U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2004
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-27653
PACIFIC CMA, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
Delaware 84-1475073
------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Airgate International Corp.
153-04 Rockaway Blvd.
Jamaica, New York 11434
------------------------------ ------------------
(Address of principal executive offices) (Zip Code)
(212) 247-0049
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each Exchange
Title of Each Class on which registered
- ---------------------------------------- -----------------------
Common Stock, par value $0.001 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the common equity of the registrant held by
non-affiliates as of March 15, 2005, was approximately $24,762,150, as computed
by reference the price of the common stock as reported as last sold on the
American Stock Exchange on such date. As of March 15, 2005, the number of issued
and outstanding shares of common stock of the registrant was 26,342,713.
PACIFIC CMA, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2004
Item Number in
Form 10-K Page
PART I
1 Business............................................................................3
2. Properties.........................................................................22
3. Legal Proceedings..................................................................23
4. Submission of Matters to a Vote of Security Holders................................23
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters and
Issuer Purchases of Equity Securities..............................................24
6. Selected Financial Data............................................................30
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation..........................................................................32
7A. Quantitative and Qualitative Disclosure About Market Risk..........................52
8. Financial Statements and Supplementary Data........................................53
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.........................................................................53
9A. Controls and Procedures............................................................54
9B. Other Information..................................................................54
PART III
10. Directors and Executive Officers of the Registrant.................................55
11. Executive Compensation.............................................................58
12. Security Ownership of Certain Beneficial Owners and Management.....................58
13. Certain Relationships and Related Transactions.....................................59
14. Principal Accountant Fees and Services.............................................60
PART IV
15. Exhibits, Financial Statement Schedules............................................61
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934 AS AMENDED AND ARE SUBJECT TO RISKS,
UNCERTAINTIES, AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
SEE ITEM 1. "BUSINESS - A NOTE ABOUT FORWARD LOOKING STATEMENTS."
2
PART I
ITEM 1. BUSINESS
Pacific CMA, Inc. ("us," "our," "we," the "Company" or "Pacific") is a
global, non-asset based logistics/freight forwarder providing supply chain
logistics services. We coordinate the shipping and the storage of raw materials,
supplies, components and finished goods by air, sea, river, rail and road. We
are capable of handling all types of cargo including garments on hangers,
refrigerated cargo, hazardous materials as well as perishable goods. Most of our
revenue is derived from airfreight and ocean freight forwarding services for
which we are paid on a transactional basis.
As of December 31, 2004, we maintained approximately 208 cargo agents
located in 92 countries and 203 cities serving major gateways worldwide.
Our current business was formed from a base of two freight forwarders,
AGI Logistics (HK) Ltd. and Airgate International Corp. ("Airgate") which were
acquired in 2000 and 2002, respectively. Our business is managed from our
principal support group offices in New York and Hong Kong.
We are a Delaware corporation with our principal offices located at
153-04 Rockaway Boulevard, Jamaica, New York 11434, Tel. 718-949-9700 and Unit
D, 11/F, Garment Centre, 576-586 Castle Peak Road, Cheung Sha Wan, Kowloon, Hong
Kong, Tel. 011-852-2953-0288. Our web sites are: www.pacificcma.com,
www.agihk.com and www.airgatecorp.com. Information on our websites do not
constitute part of this Annual Report.
General
We do not own or operate any aircraft, ships, river barges or
railroads, instead using commercial freight air carriers, ships, river barges
and railroads to provide the transportation services for freight forwarding.
Normally we arrange to pick up, or arrange for the pick up of a shipment at the
customer's location and deliver it directly to the commercial carrier. The
commercial carrier delivers it to the selected destination airport, shipping
warehouse, ship, or railway station. We then pick up the shipment and deliver it
or have it delivered to the recipient's location.
Although capable of handling packages and shipments of any size, we
focus primarily on large shipments of equipment or materials weighing over 100
kilograms. As a result of the size of our average shipment and the fact that we
are a non-asset based logistics provider, we do not generally compete with
overnight courier or expedited small package companies such as Federal Express
Corporation, United Parcel Service of America, Inc. or local postal services.
Our revenue is derived from our freight forwarding services, from the
rates that we charge our customers for the movement of their freight from origin
to destination. The carrier's contract is with us, not with our customers. We
are responsible for the payment of the carrier's charges and we are legally
responsible for the shipment of the goods and for any claims for damage to the
goods while in transit. In most cases, we receive reimbursement from the
carriers for the claims. Since many shippers do not carry insurance sufficient
to cover all losses in the event of total loss, we also carry insurance to cover
any unreimbursed claims for goods lost or destroyed. Gross revenue represents
the total dollar value of services we sell to our customers.
Our costs of transportation, products and handling include the direct
cost of transportation, including tracking, rail, ocean, air and other costs. We
frequently commit to space with shippers prior to receiving committed orders
from our customers. We act principally as a service provider to add value and
3
expertise in the procurement and execution of these services for our customers.
Our gross profits (gross revenues less the direct costs of transportation,
products, and handling) are the primary indicator of our ability to source, add
value and resell services and products that are provided by third parties.
Generally, freight forwarders are compensated on a transactional basis for the
movement of goods and related services which arise from the services they
provide to customers.
We also derive commission income from our cargo agents, but this is not
a significant source of our revenue.
We are members of the International Air Transport Association, Hong
Kong Association of Freight Forwarding Agents Ltd., and an associated member of
the International Federation of Freight Forwarders Association and have two main
operational offices -- one in New York and one in Hong Kong.
Agency offices are owned and operated by independent business owners
who enter into agency agreements with us. These cargo agents, among other
things:
o Collect freight on behalf of us and send it to the United
States and Hong Kong as appropriate;
o Provide sales and marketing support;
o Deal with break-bulk, (i.e., consolidation and
deconsolidation) of various shipments, customs brokerage and
clearance, local delivery services; and
o Handle routing of orders from an overseas country to the
United States, China and Hong Kong.
We provide these agency offices with the following services, among
others:
o Handle export cargo from the United States, China and Hong
Kong;
o Provide local pick up and transshipment via Hong Kong
rail/sea/air terminals and from origins in the United States;
o Handle import cargo from overseas;
o Deal with break-bulk, documentation, and customs brokerage and
clearance; and
o Provide warehousing and storage.
Our branch offices in Chicago, Shanghai, Futian, Chongqing, Tianjin,
Hong Kong airport and Guangzhou are responsible for providing a number of
services. Their primary function is to provide sales and customer service in a
specified market or airport city. Branch offices utilize our billing and
accounting software, which allows each branch office to transmit customer
billing and account information to our administrative offices for billing to the
customer. We also provide services through our subsidiaries in Miami (Paradigm
International, Inc. and Singapore (AGI Freight Singapore Pte. Limited). During
2004, we acquired 100% and 60% of the outstanding common stock of Paradigm
International, Inc. and AGI Freight Singapore Pte. Limited, respectively. Both
of these subsidiaries are also non-asset based freight forwarders. In August
2004, Paradigm International, Inc. established a Los Angeles, California branch
office and does business there under the name of Paradigm Global Logistics.
4
The difference between Pacific and other United States based logistics
forwarders.
Pacific, as a freight forwarder, is distinguished from other United States based
logistics forwarder in the following ways:
1. Credit Risk
In the United States, based upon our experience in the industry, it is
standard practice for importers on the East Coast of the United States to expect
thirty days from the time cargo has been delivered before invoices are due. On
the West Coast of the United States, payments are made prior to the delivery of
the goods. Because the vast majority of our business is to the East Coast of the
United States, we maintain tight credit controls and monitor the receivables
from our customers.
The majority of United States freight forwarders are non-asset based
companies and as other non-assets based businesses, find it difficult to obtain
financing from banks and therefore often have liquidity problems. This, in turn,
often results in delayed remittance to their overseas cargo agents, and it is
not uncommon that payments are delayed for more than ninety days, requiring us
to finance the payments. This clearly presents freight forwarders with
significant liquidity challenges and requires us to seek bank lines to finance
our receivables. We also face this problem. Most freight charges are incurred
and paid in Asia. This also increases our risk (in addition to the risk we
already bear because we have paid the carrier in advance) as not only do we have
the risk that the importer in the United States will not pay us, but we also
have the risk of non-payment by the cargo agent. This occurs if the importer
pays our United States cargo agent who does not remit our portion on a timely
basis.
2. Inventory Risk - Substantially all of our shipping costs are incurred
under "space contracts."
Our bank facilities are almost exclusively used to buy space from air
and sea carriers, as we must pay the carriers promptly to ensure our continued
ability to operate.
One of the banking facilities provides bank guarantees to certain
carriers. These guarantees are similar to letters of credit issued on our behalf
to shippers to assure the payment of minimum space commitments. We pay interest
on the notional amounts of the guarantees.
Unlike other United States logistics companies, we carry a high amount
of inventory risks. We have to pay not only for the guarantees we have to put up
to the carriers, we also have to pay the carriers, even if we do not have any
cargo, as we have guaranteed to pay for an agreed amount of cargo space every
week. We are not able to ask our customers to make these guarantees and,
accordingly, we assume all of the risks.
Our main operating subsidiary, AGI Logistics (HK) Ltd., is based at the
world's busiest sea freight port and airport and we believe it is different than
other cities world-wide, as the demand for space is usually greater than the
supply. This makes it unique in the sense that without space contracts it would
be nearly impossible to operate competitively, and it would be nearly impossible
to obtain space.
In Hong Kong, we also have what is termed a "Peak Season," from August
to November of each year, where both sea freight and airfreight rates increase
drastically, due to an even tighter supply of space. If we did not have space
contracts, it would be virtually impossible for us to get space from any airline
or shipping line, and the rates would be significantly higher.
5
We derive significant revenue from consolidation of cargo on airline
pallets. We always seek to build a perfect mix of light and heavy cargo which
ensures the weight capacity as well as the cubic capacity is used to the
maximum.
We also receive cargo from other freight forwarders that do not have
their own space allocation and co-load with us. If we do not have enough cargo
to fill the containers, our sales staff contacts other freight forwarders in an
effort to obtain additional cargo to fill these containers. On the other hand,
when we do not have enough space for the cargo delivered to our warehouses, we
will buy pallet space from another freight forwarder and then load our cargo in
the pallet and ship the pallet to our offices in the United States or to one of
our cargo agents elsewhere in the world.
For sea freight, we also commit and guarantee to ship a certain number
of sea freight containers with a specific shipping line and negotiate a contract
price. The more containers we have under the contract, the more competitive the
price will be. If we do not ship the contracted numbers of containers, we will
be charged a penalty (dead freight). Sea freight is generally in full container
loads, but we also consolidate containers with smaller consignments and "build"
container loads to major gateways across the world.
Hong Kong also differs from any other port or airport, as it takes many
years to receive an allocation of space from an airline or shipping line. It is
a constant task negotiating for additional space with carriers, as the more
contracted space we have, the lower the price we pay to the carrier. To buy
space on the open market or from an Airline Appointed Agent (general sales
agents specializing in selling or promoting a particular airline's cargo
services) is substantially more expensive, but sometimes we are required to pay
a higher price, although we are unable to pass the rate increase onto our
customers, and we must to move the cargo at a loss, if we want to retain the
customer.
We also charter aircraft when it is impossible to get extra or enough
space from an airline and there is a risk that we will be unable to secure
sufficient cargo to fill the aircraft. The time between our receiving an order
and securing an airplane for charter and the actual flight date is very short
and we have to make sure we can get enough business to fill up the charter
aircraft. As a Boeing 747 can cost between $350,000 to $700,000 to charter
between Hong Kong and any United States city, depending on the season, we do run
a very substantial risk, but ultimately, it is our business skill in being able
to predict the amount of business that we are likely to obtain for that week's
flight that determines if we will pay for an aircraft or turn a profit. For
charter flights, we are required to pay in full when signing the agreement.
Our losses from having to absorb committed space without having goods
to ship has not been significant. We believe this is primarily due to the
following three factors:
o We believe we are effective in gauging customer demand and
availability of space.
o The uniqueness of Hong Kong as our principal place of business
and the fact that demand for shipping space exceeds supply;
and
o Our arrangements with others in the freight forwarding
business who absorb our excess capacity.
3. Cargo Risk / Insurance Risk
Unlike other United States based logistics forwarders, Pacific has
freight forwarders' liability insurance that covers us against customer claims.
We accept responsibility for the safe delivery of cargo and will be held
responsible and incur losses if anything goes wrong. We are also responsible for
damages to cargo caused by our staff, and carry insurance that covers a loss up
to a maximum of $250,000.
6
The three factors described above are the reasons that we believe we
are different from United States based freight forwarders.
Operations in United States, Hong Kong and China
UNITED STATES. As a result of our acquisition of Airgate, a significant portion
of our operations is now taking place in New York where the focus of operations
is importing goods from the Far East. We have our own bonded warehouse where we
do daily deconsolidation of cargo. In June 2002 we opened a small branch office
in Chicago. The USA offices are licensed by International Air Transport
Association and the Federal Maritime Commission.
HONG KONG. Hong Kong is not subject to the laws of Mainland China. Hong Kong
still follows the common law system. Under the Basic Law of Hong Kong, a
mini-constitution codified prior to the return of Hong Kong to China, Hong Kong
will continue to have, until 2047, the same political, economic, and legal
system it enjoyed under the British administration. Although there is no
certainty as to the future, we believe that the autonomy of Hong Kong as a
special administrative zone of China has been respected by China to date.
CHINA. We have branch offices in China, Chongqing, Tianjin, Yantian, Guangzhou
and Shanghai. We have no direct investment in China by way of joint venture or
wholly foreign owned operation. We receive all payments for our services in Hong
Kong.
Under Chinese regulations, representative offices are not permitted to
conduct direct business activities. They are permitted only to make business
contacts and provide services on behalf of their main offices. Representative
offices cannot enter into contracts or even receive payments on behalf of the
head offices or any third parties.
Accordingly, we believe our operations are not significantly affected
by factors to which companies with significant operations in China may be
subject.
Global Agency Network
The arrangements between our overseas agents and us are usually
non-exclusive. Under these arrangements, the agents are not given any power to
commit us in any way or any authority to enter into any contract on our behalf.
The fees payable to these agents are usually determined by the requirements of
the individual customer's order and the charges.
We have approximately 208 overseas agents, many of whom have offices in
cities such as London, Hamburg, Los Angles, Tokyo, Seoul, Taipei and Sydney. As
a result, we are represented by more than one agent in many cities and do not
generally need to rely on a single agent in any one city.
Through the use of these independent sales and marketing agents, we can
expand our business without the costs typically associated with the ownership
and maintenance of company-owned branch offices.
7
Our Services
In order to continue our rapid development of our core business of
freight forwarding and logistics services, we plan to consistently provide
cost-effective and reliable freight forwarding and logistics services. Our
competitors tend to be mostly cargo agents who can offer one type of
transportation carrier to customers. However, many customers need to utilize
more than one type of transportation carrier. For example, an inland factory may
need to ship a container by truck, have it loaded via a feeder boat and
transported by a large cargo vessel. It may then have to deal with three
separate transportation agents for shipping.
By contrast, as a multi-service provider offering expedited air and sea
freight services, we can provide our customers with one-stop transportation
shopping, arranging for all necessary forms of transportation at the same time.
We have a diverse customer base. Our customers' industries include
textile and apparel, hair care product industries and to a lesser extent
automotive, computer and electronic equipment, heavy industrial, construction
equipment and printed materials.
One (1) client accounted for approximately 12% and 14% of our freight
forwarding income for the twelve (12) months ended December 31, 2004 and 2003,
respectively. Another client accounted for approximately 10% of our freight
forwarding income for the twelve (12) months ended December 31, 2004. The loss
of one or more of our major customers could have a material adverse effect on
our freight forwarding income, business and prospects.
AIR AND SEA FREIGHT BUSINESS
We have focused our development on air and sea freight services. The
mode of transportation for a particular shipment depends on, the following
factors:
o Contents
o Route
o Scheduled departures
o Available cargo capacity
o Cost
We believe that we are able to compete for cargo space, a key
competitive factor in our industry, as a result of the informal relationships
that management has fostered with various major air and sea carriers, cargo
space providers. Our ability to negotiate more favorable shipping terms is
dependent in part on our shipping volume, with the greater the volume generally
resulting in more favorable shipping rates. No assurances can be given that such
relationships will continue.
Due to the volume of shipment we arrange, we are generally able
negotiate competitive pricing for air shipments. Generally, our prices are lower
than the prices our customers could negotiate with commercial passenger and
freight air carriers, since we buy in bulk from airlines and retail the space to
individual customers.
8
IMPORT FREIGHT FORWARDING
Import freight cargo includes leather, fabrics, watch components and
chemical products. We handle an increasing number of shipments imported into the
USA mainly through New York, Los Angeles and Chicago and in Hong Kong mainly
destined for China.
An import freight forwarding transaction usually commences when we
receive a shipment advice from a customer, overseas agent or shipping agent
detailing the quantity and nature of cargo shipped and the expected date of
arrival. We promptly notify the consignee of the cargo of the relevant details
and, depending on the consignee's instructions, arrange for customs brokerage
and clearance and, if required, provide other services such as temporary
storage, local delivery and distribution. In the United States and Hong Kong and
South China, we are able to provide local delivery of cargo by either using our
own fleet of trucks or engaging subcontractors to provide the services. As we do
not maintain an office in North China, we do not provide local cargo service in
that region.
We derive our income from air and sea import freight forwarding
services in the form of commissions received from overseas agents and handling
and delivery charges from customers.
INSURANCE
We maintain customer liability insurance with maximum protection of
$250,000 for each single claim.
MARKETING
We are committed to providing competitive pricing and efficient and
reliable services to our customers worldwide. We enjoy the benefits of
management's relationships with our customers, major airlines and shipping
lines, and our extensive network of overseas agents. We believe that
management's experience has contributed to identifying prospective overseas
agents to ensure compatibility with our operations and that the ability of our
personnel to foster and maintain these valuable relationships as mentioned above
contributes to our success.
Our sales teams are responsible for marketing our services to a
diversified base of customers and bringing in new customers and overseas agents
in order to extend our agency network. The sales team members make regular
courtesy visits to existing and potential customers in the United States, Hong
Kong, Australia and Europe with a view to better understanding their needs and
expectations. Members of the sales team often provide customers with suggestions
to ensure cost-effective and efficient delivery of goods, and provide a service
intended to meet the customers' particular needs as to packaging, special
timing, seasonal demand and unusual types of freight forwarding service.
In addition to our own employees, cargo agents who are independent
contractors are appointed by us to generate business and to coordinate freight
activities in their respective markets. These cargo agents are paid on a
commission basis.
During our fiscal year ended December 31, 2004, we served more than
4,000 customers, of whom over 1,000 have maintained regular business dealings
with us over the past year.
We have a broad customer base that buys or sells merchandise such as
garments, hair care products, toys, electronics parts and appliances. We believe
one of the benefits arising from our broad customer base is that we have
acquired extensive experience in accommodating the requirements of different
customers in dealing with a great variety of products. The diversity in the mix
of cargo enhances the ability to achieve economies of scale.
9
The majority of our transactions are denominated in Hong Kong dollars
or United States dollars. The risk due to exchange rate fluctuation is
negligible so long as the Hong Kong dollar remains "pegged" to the United States
dollar. Sales are made on credit, generally 30 days, or on a cash basis. We have
a credit control policy, that our employees have been instructed to follow by
checking or obtaining the credit reference of new customers, the credit records
of our customers are reviewed by senior staff and a director must give his/her
prior approval for orders in excess of a pre-determined amount. We, on the other
hand, receive credit on a short-term basis, generally 30 days, from airlines and
shipping lines and the settlement is usually on a cash basis. In the USA, we
generally have to pay shipping lines immediately.
Our marketing efforts are directed primarily to distribution,
procurement and marketing managers of potential customers with substantial
requirements for international transportation of cargo.
COMPETITION
We have encountered strong competition from other companies in the
freight forwarding industry. Competitive factors include reliability of service,
price, available cargo space capacity and technological capacity. We believe
that we compete based on our price and reliability of service as well as
capacity, although we are not able to compete with the technology capabilities
of many of our competitors. We believe we offer a unique blend of services
involving all modes of transportation, including truck, sea, rail and air plus
warehousing as well as internal freight and inland trucking. We believe we are
well placed in Hong Kong and China to take advantage of the growing number of
shipments from and to China since China entered the Word Trade Organization.
We will consider expanding through strategic acquisitions of companies
in the same or complementary lines of business. In some circumstances, the most
efficient way to expand our operations may be to acquire existing freight
forwarders in certain key markets or companies whose services complement our
own. Expansion through acquisition may enable us to increase our market share
more rapidly and allow it to take advantage of opportunities arising from
economies of scale earlier than if we relied exclusively on internal expansion.
Our primary competitors are EGL, Inc. UTi, Rical, Speedmark, Danzas,
and Expeditors. We compete, on the basis of service provided, with regional and
local freight forwarders in the United States as well as in Asia.
GOVERNMENT REGULATION
Our operations are subject to various local and foreign regulations
that require us to maintain permits and licenses. Our failure to comply with
applicable regulations and maintain necessary permits and licenses could result
in a revocation of our operating authority or substantial fines. We believe we
are in compliance with all applicable regulations and that all our required
licenses and authorities are current.
We are subject to laws regulating the discharge of materials into the
environment. Similar laws apply in many of the foreign jurisdictions in which we
operate. Although our operations have not been significantly affected by
environmental compliance issues in the past, we cannot predict the impact
environmental regulations may have in the future. We do not anticipate making
any material capital expenditures for environmental control purposes in the
foreseeable future.
10
EMPLOYEES
As of December 31, 2004, we had 193 employees, all of whom were
employed on a full-time basis including 28 executives, 30 sales, 23
administrative persons, 101 clerical persons and 11 warehouse men. We are not a
party to a collective bargaining agreement with our employees and we believe
that our relationship with our employees is satisfactory.
RECENT DEVELOPMENTS
During the first quarter of our fiscal year ended December 31, 2004, we
changed our state of incorporation from the State of Colorado to the State of
Delaware. Other than changing our state of incorporation to the State of
Delaware, the reincorporation, we believe, had no other material effect on our
business and/or operations.
In April 2004, we sold to two institutional investors $3,000,000
aggregate amount of our 6% Series A Convertible Preferred Stock (the "A
Preferred Stock"). In this April 2004 offering, we also issued to the investors
warrants (the "Warrants") to purchase 937,500 shares (the "Warrant Shares") of
our common stock at per share exercise prices of $1.76 for 468,750 shares to
$2.00 for 468,750 shares. In connection with this April 2004 Offering, we paid
commissions of seven (7%) percent of the gross cash proceeds raised and issued
warrants to purchase145,833 shares of our common stock to an entity believed to
be a registered broker/dealer.
In May 2004, we sold to one of the foregoing institutional investors
$2,000,000 aggregate amount of our A Preferred Stock. We also issued to that
investor Warrants to purchase 625,000 Warrant Shares of our common stock at per
share exercise prices of $1.76 for 312,500 shares and $2.00 for 312,500 shares.
In connection with the May Offering, we paid commissions of eleven (11%) percent
of the gross proceeds raised and issued warrants to purchase 70,000 shares of
our common stock to an entity believed to be a registered broker/dealer.
For further information concerning the foregoing offerings, see "Item
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities - Recent Sales of Unregistered Securities."
In April 2004, we acquired Paradigm International, a Miami, Florida
logistic service provider that had been privately held. This acquisition was
made to strengthen our presence in Latin America.
In July 2004, we acquired a majority (60%) interest in AGI Freight
Singapore Pte Limited, a Singapore based logistic service provider that had been
privately held. This acquisition was made to strengthen our presence in
Southeast Asia.
In August 2004, Paradigm International, Inc. established a Los Angeles,
California branch office and does business there under the name of Paradigm
Global Logistics.
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (including the Exhibits hereto)
contains certain "forward-looking statements" within the meaning of the of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995,
such as statements relating to our financial condition, results of operations,
plans, objectives, future performance and business operations. Such statements
relate to expectations concerning matters that are not historical fact.
Accordingly, statements that are based on management's projections, estimates,
assumptions and
11
judgments are forward-looking statements. These forward-looking statements are
typically identified by words or phrases such as "believe," "expect,"
"anticipate," "plan," "estimate," "approximately," "intend," and other similar
words and expressions, or future or conditional verbs such as "should," "would,"
"could," and "may." In addition, we may from time to time make such written or
oral "forward-looking statements" in future filings with the Securities and
Exchange Commission (the "Commission") (including exhibits thereto), in our
reports to stockholders, and in other communications made by or with our
approval. These forward-looking statements are based largely on our current
expectations, assumptions, plans, estimates, judgments and projections about our
business and our industry, and they involve inherent risks and uncertainties.
Although we believe that these forward-looking statements are based upon
reasonable estimates and assumptions, we can give no assurance that our
expectations will in fact occur or that our estimates or assumptions will be
correct, and we caution that actual results may differ materially and adversely
from those in the forward-looking statements. Forward-looking statements involve
known and unknown risks, uncertainties, contingencies and other factors that
could cause our or our industry's actual results, level of activity, performance
or achievement to differ materially from those discussed in or implied by any
forward-looking statements made by or on behalf of us and could cause our
financial condition, results of operations or cash flows to be materially
adversely affected. Accordingly, investors and all others are cautioned not to
place undue reliance on such forward-looking statements. In evaluating these
statements, some of the factors that you should consider include those described
below under "Risk Factors" and elsewhere in this Form 10-K.
RISK FACTORS
You should carefully review and consider the following risks as well as
all other information contained in this Annual Report on Form 10-K, including
our consolidated financial statements and the notes to those statements. The
following risks and uncertainties are not the only ones facing us. Additional
risks and uncertainties of which we are currently unaware or which we believe
are not material also could materially adversely affect our business, financial
condition, results of operations, or cash flows. In any case, the value of our
common stock could decline. To the extent any of the information contained in
this Annual Report constitutes forward-looking information, the risk factors set
forth below are cautionary statements identifying important factors that could
cause our actual results for various financial reporting periods to differ
materially from those expressed in any forward-looking statements made by or on
our behalf and could materially adversely effect our financial condition,
results of operations or cash flows. See also, "A Note About Forward-Looking
Statements."
Certain Risks Related to Operating an Investment Business
Particularly in Hong Kong and the Peoples Republic of China ("China")
We are subject to international economic and political risks, over which we have
little or no control.
A significant portion of our business is providing services between
continents, particularly between North America and Asia. Further, our main
operating subsidiary, AGI Logistics (HK) Ltd., conducts operations in the Far
East, including China and Hong Kong. Doing business outside the United States
subjects us to various risks, including changing economic and political
conditions, major work stoppages, exchange controls, currency fluctuations,
armed conflicts and unexpected changes in United States and foreign laws
relating to tariffs, trade restrictions, transportation regulations, foreign
investments and taxation. We have no control over most of these risks and other
unforeseeable risks and may be unable to anticipate changes in international
economic and political conditions and, therefore, unable to alter our business
practice in time to avoid the adverse effect of any of these changes. For
example: (a) following the events of September 11, 2001, airlines charged
additional costs such as fuel, insurance and war risk surcharges, that are
generally passed on to shippers and consignees, increasing their shipping costs,
resulting in a reduction in our customers' shipping incentive and increasing our
12
rate of order cancellation; and (b) in March of 2003, the World Health
Organization received reports of "Severe Acute Respiratory Syndrome" ("SARS") in
various parts of the world that caused airlines to reduce capacity and that, in
turn, adversely effected external trade from Hong Kong and the Pearl River Delta
Region of China. Our operations were adversely effected by the events of
September 11, 2001 and the SARS health issue.
We may be unable to adapt to the challenges posed by competing in a changing
international environment.
Doing business outside the United States subjects us to various
challenges. See "-We are subject to international economic and political risks,
over which we have little or no control." We have no control over most of these
challenges and may be unable to anticipate and/or adapt to changes in
international economic and political conditions and, therefore, may be unable to
avoid the adverse effect of any of these changes.
The political uncertainty in Hong Kong and China makes it difficult to develop
any long range business planning.
The transition of Hong Kong's governance from Great Britain to China
has resulted in uncertainty regarding the extent to which China intends to
impose and enforce its laws and business practices in Hong Kong. In addition,
China itself is just beginning to open its doors to foreign businesses and
private ownership of companies and businesses within China. There is no
guarantee that China will continue these progressive reforms or that they
maintain the ones they have currently. Further, there is no guarantee that China
will permit Hong Kong to continue as a semi-independent entity. AGI Logistics
(HK) Ltd. relies heavily on business to and from China and Hong Kong. Any change
in the political climate in this region may make it more difficult for us to
continue operations in that region.
If relations between the United States and China worsen, investors may be
unwilling to hold or buy our stock and our stock price may decrease.
At various times during recent years, the United States and China have
had significant disagreements over political and economic issues. Controversies
may arise in the future between these two countries. Any political or trade
controversies between these two countries, whether or not directly related to
our business, could adversely effect the market price of our common stock.
The Chinese government could change its policies toward private enterprise or
even nationalize or expropriate private enterprises, which could result in the
total loss of our investment in that country.
Our business is subject to significant political and economic
uncertainties and may be adversely effected by political, economic and social
developments in China. Over the past several years, the Chinese government has
pursued economic reform policies including the encouragement of private economic
activity and greater economic decentralization. The Chinese government may not
continue to pursue these policies or may significantly alter them to our
detriment from time to time with little, if any, prior notice.
Changes in policies, laws and regulations or in their interpretation or
the imposition of confiscatory taxation, restrictions on currency conversion,
restrictions or prohibitions on dividend payments to stockholders, devaluations
of currency or the nationalization or other expropriation of private enterprises
could have a material adverse effect on our business. Nationalization or
expropriation could even result in the total loss of our investment in China and
in the total loss of your investment in us.
13
A lack of adequate remedies and impartiality under the Chinese legal system may
adversely impact our ability to do business and to enforce the agreements to
which we are a party.
We periodically enter into agreements governed by Chinese law. Our
business would be materially and adversely effected if these agreements are not
respected. In the event of a dispute, enforcement of these agreements in China
could be extremely difficult. Unlike the United States, China has a civil law
system based on written statutes in which judicial decisions have little
precedential value. The Chinese government has enacted some laws and regulations
dealing with matters such as corporate organization and governance, foreign
investment, commerce, taxation and trade. However, the government's experience
in implementing, interpreting and enforcing these recently enacted laws and
regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is uncertain. Furthermore, enforcement of the laws
and regulations may be subject to the exercise of considerable discretion by
agencies of the Chinese government, and forces unrelated to the legal merits of
a particular matter or dispute may influence their determination. These
uncertainties could limit the protections that are available to us.
Fluctuations in exchange rates could adversely affect our results of operations
and financial condition.
Though we use the United States dollar for financial reporting
purposes, many of the transactions effected by our subsidiary AGI Logistics (HK)
Ltd., are denominated in Hong Kong dollars. Although the value of Hong Kong
dollar is currently linked to United States dollar, no assurance can be given
that such currencies will continue to be linked, and that if such link is
terminated, the exchange rate of the Hong Kong dollar may fluctuate
substantially against the United States dollar. Because we do not currently
engage in hedging activities to protect against foreign currency risks and even
if we chose to engage in such hedging activates, we may not be able to do so
effectively, future movements in the exchange rate of the Hong Kong dollar could
have an adverse effect on our results of operations and financial condition.
We are dependent on third parties for equipment and services essential to
operate our business and we could lose customers and revenues if we fail to
secure such equipment and services.
We rely on third parties to transport the freight we have agreed to
forward. Thus our ability to forward this freight and the costs we incur in
connection therewith is dependent on our ability to find shippers willing to
ship such freight and at favorable prices. This in turn, depends on a number of
factors beyond our control, including availability of cargo space (which depends
on the season of the shipment, the shipment's transportation route, the number
of transportation providers and availability of equipment). An increase in the
cost of cargo space, due to shortages in supply, increases in fuel cost or other
factors, would increase our costs and reduce profits, especially, as has
occurred in the past, if we are unable to pass the full amount of increased
transportation costs to the customer.
We also rely extensively on the services of independent cargo agents
(who may also be providing services to our competitors) to provide various
services including consolidating and deconsolidating various shipments. Although
we believe our relationships with our cargo agents are satisfactory we may not
be able to maintain these relationships. If we are unable to maintain these
relationships or develop new relationships, our service levels, operating
efficiency and future freight volumes may be adversely effected.
We may face competition from our cargo agents and employees.
Our agents and employees, some of whom are integral to maintaining and
developing our relationships with certain key customers or for providing
services at strategic locations, because they have
14
had the opportunity to develop a relationship with our customers and otherwise
gained important information regarding our business practices, may be able to
compete with us with respect to such customer's business.
Our business is seasonal and cyclical and our operating results and financial
condition may therefore fluctuate.
Our business, as is true generally in the freight forwarding industry,
is seasonal; the first quarter of the calendar year has traditionally been the
weakest and the third and fourth quarters have traditionally been the strongest.
Significant portions of our revenues are derived from customers in industries
such as apparel and hair product industries, whose shipping patterns are tied
closely to consumer demand. To the extent that the principal industries we serve
experience cyclical fluctuations, our operating results will be effected by such
fluctuations.
No ongoing contractual relationship with our customers.
We have a very broad and varied customer base. In our fiscal year ended
December 31, 2004 ("Fiscal 2004"), we transacted business with more than 2,500
customers. However, our customers wish to remain flexible in choosing freight
forwarders and prefer to avoid contractual commitments so that they are able to
select and to change forwarders at any time on the basis of competitive rates
and quality of service. Therefore, we render freight forwarding services to our
customers on a transaction by transaction basis, rather than under the terms of
any type of on-going contractual relationship. We have one customer that
increased its business with us during our three fiscal years ending December 31,
2004 by moving some of its cargo from another agent to us. In Fiscal 2004,
Fiscal 2003 and Fiscal 2002, this customer represented approximately 12%, 14%
and 12%, respectively, of our total revenue, but we still only handle part of
the business of this customer. There is no guarantee that we will retain this
customer's business.
Even with large customers we usually have to give rate quotations
before we can secure their business. However, the rates we quote to our
customers are still subject to fluctuation and must be adjusted according to
changes in the market. As a result, the freight rate quotations we give to our
customers are not a guarantee that they will ship or continue to ship their
cargo with us. It is not unusual for a customer to ship with many different
agents, sometimes because we cannot match the lowest price they have been
offered on a particular day. If a customer has a large shipment, they may ask
several companies for quotations at the same time and award the shipment to the
company with the cheapest rate or the fastest transit time on a particular day.
Therefore, although we could lose the business of a customer on one day, the
next day we might be successful in obtaining other business from that same
customer.
It is the nature of the freight forwarding and logistics business that
we must continuously seek new customers because the turnover of customers is
very high and it is not common to have contracts with customers. Certain large
companies who ship goods all over the world may sign contracts with freight
forwarders. But, since we have only a limited number of our own offices and must
rely on overseas agents in many parts of the world, we are not yet large enough
to be in a position to compete for these kinds of contracts. As a result, there
can be frequent changes in our customer list, and there is no assurance that we
will be able to maintain our current relationship with particular customers.
We do business with our competitors.
Some of our business is with large freight forwarders who are actually
our competitors. Since these companies handle customs clearance for some of our
customers, we must cooperate with these competitors and bill them to obtain
payment for the air or sea freight of our customers. This represents a major
15
risk for us because these competitors are major freight forwarders handling the
same routes as us, and are also likely to be continuously attempting to solicit
business away from us. In order to retain our customers in such circumstances,
we must attempt to provide a very high level of service.
We are dependant on our overseas agents and their quality of services.
As a portion of our business is also derived from customers that are
handled by our overseas agents, this presents risk for us, since we cannot
control the level of service which is provided by our overseas agents and we
risk losing business as a result of problems that customers may encounter in
dealing with these agents.
Our freight forwarding income could be reduced by the loss of major customers.
One client accounted for approximately 12% and 14% of our freight
forwarding income for Fiscal 2004 and Fiscal 2003, respectively. Another client
accounted for approximately 10% of our freight forwarding income for Fiscal
2004. The loss of one or more of our major customers could have a material
adverse effect on our freight forwarding income, business and prospects.
We are dependent on certain transportation providers to provide shipping
services on our behalf and the loss of such providers may reduce our ability to
compete.
Because we are generally able to negotiate more favorable shipping
rates as a result of shipping a greater volume of product with a limited number
of transportation providers, the loss of one or more of these providers could
result in an increase in our cost of freight forwarding.
Growth through acquisitions poses the risks that we may be unable to identify,
make and successfully integrate acquisitions that could adversely effect our
profitability.
We may choose growth through acquisitions, to maintain or improve our
competitive position in the industry, which rewards economies of scale.
Identifying, acquiring and integrating businesses requires substantial
management, financial and other resources and may pose risks with respect to
customer service market share and dilution of our investors' ownership interests
in the event we make acquisitions through the issuance of securities. Further,
acquisitions involve a number of special risks, some or all of which could have
a material adverse effect on our business, financial condition and results of
operation. These risks include:
o unforeseen operating difficulties and expenditures;
o difficulties in assimilation of acquired personnel, operations
and technologies;
o the need to manage a significantly larger and more
geographically dispersed business;
o impairment of goodwill and other intangible assets;
o diversion of management's attention from ongoing development
of our business or other business concerns;
o potential loss of customers;
16
o failure to retain key personnel of the acquired businesses;
and
o the use of our available cash, to the extent any is available.
No assurance can be given that any acquisition will be completed, or
that such acquisition will increase our earnings and not dilute our investors'
ownership interests in us. If we do not grow through acquisitions and/or through
internally generated growth, our competitive position may weaken due to the
economies of scale (including greater pricing power) that our competitors will
have.
We may make acquisitions without stockholder approval.
If we decide to make any acquisitions, we will endeavor to evaluate the
risks inherent in any particular acquisition. However, there can be no assurance
that we will properly or accurately ascertain all such risks. We will have
virtually unrestricted flexibility in identifying and selecting prospective
acquisition candidates and in deciding if they should be acquired for cash,
equity or debt, and in what combination of cash, equity and/or debt.
We will not seek stockholder approval for any acquisitions unless
required by applicable law and regulations. Our stockholders will not have an
opportunity to review financial and other information on acquisition candidates
prior to consummation of any acquisitions under almost all circumstances.
Investors will be relying upon our management, upon whose judgment the
investor must depend, with only limited information concerning management's
specific intentions.
There can be no assurance that we will locate any such additional
acquisition candidate, successfully complete such additional acquisition, or any
acquisition will perform as anticipated, will not result in significant
unexpected liabilities or will ever contribute significant revenues or profits
to us or that we will not lose our entire investment in any acquisition
candidate.
We manage our business on a decentralized basis which may restrict
implementation of adequate business controls, and may limit our ability to
manage our business effectively.
We manage our business on a decentralized basis, allowing our
subsidiaries and their management to retain significant responsibility for the
day-to-day operations, profitability and growth. As we grow, our management may
not maintain adequate controls on inter-company disbursements for freight
forwarding and customs brokerage services. In addition, our subsidiaries may be
operating with management, sales and support personnel that may be insufficient
to support growth in their respective operation without significant central
oversight and coordination. If proper overall business controls have not been
and are not implemented, a decentralized operating strategy could result in
inconsistent operating and financial practices, which could materially and
adversely effect our profitability.
Because we are a holding company, we are financially dependent on
receiving distributions from our subsidiaries and this could prove harmful if
such distributions are not made. The ability of our subsidiaries to pay such
distributions is subject to all applicable laws and other restrictions
including, but not limited to, applicable tax laws. Such laws and restrictions
could limit the receipt of distributions, the payment of dividends and restrict
our ability to continue operations.
17
Our failure to develop, integrate, upgrade or replace information technology
systems may result in the loss of business.
The battle for market share within the freight forwarding industry has
traditionally been waged over price, service quality, reliability, the scope of
operations and response to customer demand. Increasingly, our competitors are
competing for customers based upon the flexibility and sophistication of the
technologies supporting their freight forwarding services. Adequate information
technology systems afforded by freight forwarders allows freight forwarding
customers to manage inventories more efficiently. Many of our competitors have
information systems that are significantly more sophisticated than our systems.
We have only invested a minimum amount of funds on these systems and do not
intend to spend significant funds on such systems in the near future. If our
information technology systems are not perceived as assisting our customer's
ability to conduct business efficiently, our service levels, operating
efficiency and future freight volumes could decline.
If we fail to comply with applicable government regulation we could be subject
to fines and penalties and may be required to cease operation.
Our air transportation activities in the United States are subject to
regulation by the Department of Transportation, as an indirect air carrier, and
by the Federal Aviation Administration. Our overseas offices and agents are
licensed as airfreight forwarders in their respective countries of operation. We
are licensed in each of our offices as an airfreight forwarder by the
International Air Transport Association. In the case of our newer offices, we
have applied for such a license. We believe we are in substantial compliance
with these requirements.
We are licensed as an ocean freight forwarder by and registered as an
ocean transportation intermediary with the Federal Maritime Commission ("FMC").
The FMC has established qualifications for shipping agents, including surety
bonding requirements. The FMC also is responsible for the economic regulation of
non-vessel operating common carriers that contract for space and sell that space
to commercial shippers and other non-vessel operating common carrier operators
for freight originating or terminating in the United States. To comply with
these economic regulations, vessel operators and non-vessel operating common
carriers are required to file tariffs which establish the rates to be charged
for the movement of specified commodities into and out of the United States. The
FMC has the power to enforce these regulations by assessing penalties. For ocean
shipments not originating or terminating in the United States, the applicable
regulations and licensing requirements typically are less stringent than in the
United States. We believe we are in substantial compliance with all applicable
regulations and licensing requirements in all countries in which we transact
business.
Although our current operations have not been significantly affected by
compliance with current United States and foreign governmental regulations, we
cannot predict what impact future regulations may have on our business. Our
failure to maintain required permits or licenses, or to comply with applicable
regulations, could result in substantial fines or revocation of our operating
authorities.
We incur significant credit risks in the operation of our business.
Certain aspects of the freight forwarding industry involve significant
credit risks. It is standard practice for importers on the east coast of the
United States to expect freight forwarders to offer thirty days credit on
payment of their invoices from the time cargo has been delivered for shipment.
Since the majority of our business is to the east coast of the United States,
competitive conditions require that we offer thirty days credit to our customers
who import to the east coast of the United States. In order to avoid cash flow
problems we attempt to maintain tight credit controls and avoid doing business
18
with customers we believe may not be creditworthy. However, there is no
assurance that we will be able to avoid periodic cash flow problems or that we
will be able to avoid losses in the event customers to whom we have extended
credit either delay their payments to us or become unable or unwilling to pay
our invoices after we have completed shipment of their goods.
We incur significant inventory risk because substantially all of our shipping
costs are incurred under space contracts and guarantees.
Substantially all of our shipping costs are incurred under space
contracts pursuant to which we agree in advance to purchase cargo space from air
and sea carriers or guarantee a minimum volume of shipments per week. We are
required to pay for the guarantees and for the purchase of this cargo space even
if we do not have cargo from our customers to fill the space. In the past we
have been able to minimize any losses from this aspect of our business by
seeking to carefully gauge customer demand and the availability of shipping
space, by conducting significant operations in Hong Kong where the demand for
shipping space generally exceeds supply, and by making arrangements with other
freight forwarders to absorb excess capacity. However, there is no assurance
that we will be able to avoid such losses in the future as a result of being
required to absorb the cost of committed space without having goods to ship on
behalf of our customers.
If our insurance coverage is not sufficient to cover us from liability claims
arising from accidents or claims, we may incur substantial unanticipated
expenses.
Freight that we forward may be damaged or lost during the shipping
process. Furthermore, we may forward hazardous materials which may, if handled
improperly, harm people and property. Though we carry $250,000 freight service
liability and $250,000 third party liability insurance on every single handled
shipment, claims for injuries to persons or property may exceed the amount of
our coverage. There is the risk that our liability coverage could be inadequate
to cover consequential losses, business interruptions, delays, misdeliveries,
customs fines or penalties and uncollected freight that are limited to $250,000
for any one loss and in the aggregate in any one policy year.
Risks Relating to Us and Our Securities
The loss of key personnel may impede our ability to compete effectively.
Our success is dependent on the efforts of Alfred Lam, Scott Turner and
Kaze Chan who serve as our Chairman, President and Executive Vice President,
respectively. We do not maintain key person life insurance on any of these
individuals. In addition, there is significant competition for qualified
personnel in our industry and there can be no assurance that we will be able to
continue to attract and retain the necessary personnel. We are dependent on
retaining our current employees, many of whom have developed relationships with
representatives of carriers and customers, relationships which are especially
important in a non-asset based logistics provider such as ourselves. Loss of
these relationships could have a material adverse effect on our profitability.
Control by Alfred Lam; Potential Conflict of Interests.
Alfred Lam, our Chairman of the Board, Director and Treasurer, as a
practical matter, is able to nominate and cause the election of all the members
of our Board of Directors, control the appointment of our officers and our
day-to-day affairs and management of our Company. Mr. Lam beneficially owns
approximately 68% of our issued and outstanding voting securities. As a
consequence, Mr. Lam can have the Company managed in a manner that would be in
his own interests and not in the interests of the other stockholders of the
Company.
19
You may experience difficulties in attempting to enforce liabilities based upon
United States federal securities laws against AGI Logistics (HK) Ltd. and its
non-United States resident directors and officers.
AGI Logistics (HK) Ltd., one of our significant subsidiaries is located
in the Far East and its principal assets are located outside the United States.
Many of our directors and executive officers are foreign citizens and do not
reside in the United States. Service of Process upon such persons may be
difficult to effect in the United States. It may be difficult for courts in the
United States to obtain jurisdiction over these foreign assets or persons and as
a result, it may be difficult or impossible for you to enforce judgments
rendered against us, our directors or executive officers in the United States
courts. In addition, the courts in the countries in which some of our
subsidiaries are organized, where our and our subsidiaries assets are located or
where many of our directors and executive officers reside, may not permit
lawsuits for the enforcement of judgments arising out of the United States (and
state) securities or similar laws.
It may be difficult to effect transactions in our stock if we are delisted from
AMEX.
Our shares of common stock are listed for trading on the AMEX. There
can be no assurance of the continuation of such listing. If our common stock
were to be delisted from the AMEX, we could become subject to the Commission's
"pennystock" rules. Broker/dealer practices in connection with transactions in
pennystocks are regulated by rules adopted by the Commission, and these
practices may limit the number and types of people and entities willing to
invest in a "pennystock." For any transaction involving a pennystock, unless
exempt, the rules require the delivery, prior to any transaction in a
pennystock, of a disclosure statement prepared by the Commission relating to the
pennystock market. Disclosure also has to be made about the risks of investing
in pennystocks in both public offerings and in secondary trading. The pennystock
rules also generally require that prior to a transaction in a pennystock, the
broker/dealer make a special written determination that the pennystock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. The broker/dealer must provide the customer with
current bid and offer quotations for the pennystock, the compensation of the
broker/dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each pennystock held in the customer's
account.
We have outstanding conversion rights, options, warrants and registration rights
that may limit our ability to obtain equity financing and could cause us to
incur expenses.
We have issued warrants to certain stockholders in connection with
private placement offerings of our securities in 2003 and 2004. In accordance
with the respective terms of our A Preferred Stock, warrants and any options
granted and that may be granted under our stock option plan or to future
investors, the holders are given an opportunity to profit from a rise in the
market price of our common stock, with a resulting dilution in the interests of
the other stockholders. The terms on which we may obtain additional financing
during the exercise periods of any outstanding conversion rights, warrants and
options may be adversely effected by the existence of such conversion rights,
warrants and options. The holders of conversion rights, options or warrants may
exercise such conversion rights, options or warrants to purchase our common
stock at a time when we might be able to obtain additional capital through
offerings of securities on terms more favorable than those provided by such
conversion rights, options or warrants. In addition, the investors in the
foregoing private securities offerings have demand and "piggyback" registration
rights with respect to their securities. Also, certain stockholders that we
20
entered into settlement agreements with, provide for certain registration
rights. To date, we have complied with such registration rights. Continuing
compliance with such registration rights may involve substantial expense.
We have sold shares below the then current market price and warrants with a
lower exercise price than the current market price.
In late 2003, in a private offering, we sold 1,242,240 shares of our
common stock at $1.61 per share, a discount of approximately 25% below the
twenty day average closing price for shares of our common stock on the Over The
Counter Bulletin Board and to issue warrants without additional consideration to
purchase 1,007,455 shares of our common stock exercisable at prices ranging from
$.80 per share to $2.17 per share. In April and May 2004, in private offerings
with two institutional investors, we sold $5,000,000 in aggregate amount of our
A Preferred Stock. Each such share of A Preferred Stock has a stated value of
$1,000 per share and is convertible into shares of our common stock at $1.44 per
share, a discount of approximately 10% below the AMEX reported closing market
price for our common stock on April 8, 2004.
Additionally, we issued warrants, without additional consideration to
the two institutional investors and placement agents to purchase up to
approximately 1,778,333 shares of our common stock, one-half of such warrants
being exercisable at $1.76 per share and the remaining one-half at $2.00 per
share.
The sale of securities pursuant to these private offerings and any
future sales of our securities will dilute the percentage equity ownership of
then existing owners of the shares of our common stock and may have a dilutive
effect on the market price for our outstanding shares of common stock.
As of March 15, 2005, we had 26,342,713 shares of our common stock
issued and outstanding, with 1,050,000 shares to be cancelled. Of those
26,342,713 shares, approximately 4,505,777 shares of our common stock are freely
tradable. The foregoing 4,505,777 shares does not give effect to the exercise of
any of the conversion rights of the holders of our A Preferred Stock, the
issuance of shares to them in the future in payment of their dividend rights,
through March 1, 2005, 325,115 dividend shares have been issued, or the exercise
of our issued and outstanding warrants and options, including the warrants held
by the private investors. Also, that number does not include approximately
407,653 shares that were outstanding prior to our acquisition of AGI Logistics
(HK) Ltd. that we believe are restricted as to resale pursuant to federal
securities laws.
Our A Preferred Stock Creates Disincentives to a merger or other changes in
control.
The terms of our A Preferred shares include disincentives to a merger
or other change of control, which could discourage a transaction that would
otherwise be in the interest of our stockholders.
In the event of a change of control (as defined), the terms of the A
Preferred Stock permit the holder to require us to repurchase their shares at a
mandatory redemption price (as defined). If all of the shares of A Preferred
Stock were outstanding at the time of a change of control, this could result in
a payment to the holders of the greater of 110% of the stated value of those
shares ($5,500,000) or the VWAP (as defined) at that time, plus all accrued and
unpaid dividends and liquidated damages. The possibility that we might have to
pay this large amount of cash would make it more difficult for us to agree to a
merger or other opportunity that might arise even though it would otherwise be
in the best interest of the stockholders.
21
Our A Preferred Shares Contain Redemption Provisions may limit available cash
for our operations.
The terms of our A Preferred Stock require us to redeem those shares
for cash in certain circumstances in addition to a change of control situation.
Also, our A Preferred Stock requires mandatory redemption if (a) we
fail to timely issue shares of common stock upon conversion, remove legends on
certificates representing shares of common stock issued upon conversion or to
fulfill certain covenants, (b) certain bankruptcy and similar events occur; and
(c) we fail to maintain the listing of the common stock on the Nasdaq National
Market, the Nasdaq Small Cap Market, the AMEX or the NYSE.
We must redeem the A Preferred Stock in April and May 2008 for an
amount equal to 100% of the stated value per share plus all accrued and unpaid
dividends and all liquidated damages and other amounts due on such shares.
As a consequence, we may have to redeem our A Preferred Stock for a
substantial amount of cash, which would severely restrict the amount of cash
available for our operations.
In the event that we are able to find replacement financing that does
not require dilution of the common stock, these restrictions would make it
difficult for us to "refinance" the preferred stock and prevent dilution to the
common stock.
Our A Preferred Stock Contain Disincentives to obtaining additional financing.
The potential dilution of a common stockholder's ownership of position
in us resulting from our A Preferred Stock will increase if we sell additional
common stock for less than the conversion price applicable to our A Preferred
Stock. The terms of our A Preferred Stock require us to adjust the conversion
price if we sell common stock or securities convertible into common stock at a
lower price than the conversion of our A Preferred Stock. The adjusted price
will be that lower price and we will have to issue even more shares of common
stock to the holders of our A Preferred Stock than initially agreed on.
Our A Preferred Stock requires quarterly dividends of six (6%) percent
per annum. We have the option of paying these dividends in shares of common
stock instead of cash and we have and expect to continue to use that option. The
number of shares of common stock that are required to pay the dividends is
calculated based on a discount to our market price, so the lower our common
stock price, the more shares of common stock it takes to pay the dividends. The
continued issuance of these additional shares of common stock will further
dilute a stockholder's ownership position in the Company and put additional
downward pricing pressure on the common stock.
ITEM 2. PROPERTIES
Set forth below is summary information of our current operating facilities:
LOCATION PRINCIPAL USES OF SPACE (IN SQUARE FEET) LEASE EXPIRATION
- --------- ----------------------- ---------------- ----------------
Jamaica, New York Office 6,000 May 31, 2008
Warehouse 6,000 November 30, 2008
Chicago, Illinois Air and sea freight warehouse/office 1,500 July 31, 2005
22
Los Angeles, California Office 2,500 June 30, 2006
Singapore Office 560 June 30, 2005
Air and sea freight warehouse/office 2,000
Shanghai Office 2,200 May 23, 2006
Hong Kong Office 7,610 March 14, 2005
Air freight office& warehouse/office 16,000 February 28, 2007
Republic of China
-----------------
Shenzen, Futian Office 3,000 December 31, 2007
Guangzho Office 2,800 May 23, 2006
Chongqing Office 1,000 August 26, 2006
Tianjin Office 950 April 30, 2005
We believe that our operating facilities are adequate for our present purposes
and that additional operating facilities, if required, will be available to us
on reasonably acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2004, and during the fiscal year then ended, we were
not a party to any material legal proceedings.
However, in March 2004, we filed a complaint (the "Complaint") in the
United States District Court for the Southern District of New York, entitled
Pacific CMA, Inc. and Alfred Lam a/k/a Alfred Lam King Ko v. Frascona, Joiner,
Goodman and Greenstein, P.C., et al. (the "Action"). In our Complaint, we
alleged various violations of the anti-fraud provisions of the federal
securities laws involving the purchase and sale of securities against the
defendants, as well as breaches of fiduciary duty.
Pursuant to the Settlement Agreements with the defendants (the
"Settlement Agreement"), in exchange for our agreeing to dismiss the Action, the
defendants agreed to return an aggregate of 761,448 shares of our common stock
held by such persons which shares were reissued to Mr. Lam, and we agreed to
register for resale under the Securities Act of 1933, as amended (the "Act"),
their remaining 763,739 shares of our common stock. The defendants also agreed
to certain limitations on the numbers of shares that they may sell under said
registration statements within certain periods of time. The required
registration statements became effective in August and November 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our securityholders during
the fourth quarter of our fiscal year ended December 31, 2004.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is presently traded on the American Stock Exchange under the
trading symbol "PAM" and has been since December 5, 2003. Prior to December 5,
2003 and from October 31, 2001, our common stock traded on the Over-The-Counter
Bulletin Board ("OTCBB") under the symbol "PCCM". At the close of business on
March 15, 2005, there were outstanding 26,342,713 shares of common stock which
were held by approximately 316 stockholders of record (and approximately 640
beneficial owners). The closing price of our common stock as reported on the
AMEX and since December 5, 2003 and the closing high and low bid price
quotations for our common stock, as reported by the OTCBB are as follows for the
periods indicated:
High Low
---- ---
Year Ended December 31, 2003:
-----------------------------
First Quarter................. $0.95 $0.41
Second Quarter................ $1.10 $0.51
Third Quarter................. $1.41 $0.58
Fourth Quarter................ $2.75 $1.30
Year Ended December 31, 2004:
-----------------------------
First Quarter................. $1.95 $1.22
Second Quarter................ $1.63 $0.76
Third Quarter................. $1.08 $0.75
Fourth Quarter................ $0.96 $0.53
We believe that the AMEX is the principal market for our common stock.
The over-the-counter market quotations set forth above for our common stock
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
DIVIDENDS
Subject to the rights that have been designated to the holders of our A
Preferred Stock and that any other holders of preferred stock that may be
authorized by our Board, holders of our common stock are entitled to receive
dividends when and if declared by our Board of Directors out of funds legally
available. We have not paid any dividends on our common stock. The payment of
dividends, if any, in the future is within the discretion of the Board of
Directors and is also subject to the terms of our credit facility that could
restrict our ability to pay dividends if we do not satisfy certain financial
requirements. The payment of dividends, if any, in the future will depend upon
our earnings, capital requirements, financial condition and other relevant
factors. Our Board of Directors does not presently intend to declare any
dividends in the foreseeable future. Instead, our Board of Directors intends to
retain all earnings, if any, for use in our business operations.
Pursuant to our Certificate of Incorporation, our Board of Directors is
authorized, subject to any limitations prescribed by law, to provide for the
issuance of shares of up to 10,000,000 shares of preferred stock from time to
time in one or more series and to establish the number of shares to be included
in each such series and to fix the designation, powers, preferences and
relative, participating,
24
optional and other special rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. Because the Board of
Directors has such power to establish the powers, preferences and rights of each
series, it may afford the holders of preferred stock preferences, powers and
rights (including voting rights) senior to the rights of the holders of common
stock. The issuance of shares of preferred stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal.
There is currently one series of preferred stock issued and
outstanding: A Preferred Stock, with 10,000 shares being authorized and 5,000
shares being issued and outstanding. Up to an additional 9,990,000 shares of
preferred stock remain authorized. Set forth below is a summary only and it is
qualified by our Certificate of Incorporation and the Certificate of Designation
for our A Preferred Stock, copies of which are available from the Company upon
request.
Description of A Preferred Stock. You can find definitions of certain
terms used in this description of the features of our A Preferred Stock under
the subheading "Certain Definitions" below.
Stated Amount Per Share: $1,000
Par Value Per Share: $.001
Dividends: Cumulative: 6% per annum on the stated value of $1,000 payable in
arrears beginning June 1, 2004 payable in cash or in shares of
common stock at our election (in the event certain conditions
are met). Since June 1, 2004, we have paid an aggregate of 321,115
shares of common stock and $32,500 in cash dividends on shares of A
Preferred Stock.
Liquidation Preference: Prior to common stock; liquidation payment of $1,000 per share
outstanding plus any outstanding unpaid dividends and damages.
Voting Rights: None, except as required by Delaware law or if we (i) alter or
change adversely the powers, preferences or privileges of the A
Preferred Stock or alter or amend the Certificate of Designation;
(ii) authorize or create any class of stock senior or otherwise pari
passu with the A Preferred Stock; (iii) amend our Certificate of
Incorporation or other charter documents so as to affect adversely
any rights of the holders of the A Preferred Stock, (iv) increase
the authorized number of shares of Preferred Stock; or (v) enter
into any agreement to do any of the foregoing.
Conversion Price: $1.44 per share, subject to adjustment.
Conversion Time: By the Holders: At any time and from time to time.
Adjustments to Conversion Price: The conversion price is subject to adjustment for stock splits,
stock dividends and similar events. In addition, if we sell common
stock or securities convertible into or exchangeable for common stock
at a price less than the conversion price in effect (the "Lower
Price"), the conversion price will be adjusted to equal the Lower
Price.
25
Mandatory Redemption on
Fourth Anniversary: In or about April and May 2008, the Company is required to
redeem all outstanding shares of our A Preferred Stock for an amount equal
to the stated value of said shares, plus all accrued and unpaid dividends and
liquidated damages.
Mandatory Redemption: Certain events, such as our filing a petition under the federal
bankruptcy laws, a change in Control of the Company, our failure to
timely deliver shares upon an investor's conversion or maintain
our common stock's listing or quotation for more than ten days (that
also results in a mandated redemption but at a differing price). If
based on one of these and other specified events, we will be
required to pay an amount equal to the greater of 110% of the
Stated Value of the outstanding shares of A Preferred Stock or VWAP
at the time, plus all accrued and unpaid dividends and liquidated
damages.
Liquidated Damages for Failure to
Meet Registration Deadlines: If sales of our common stock cannot be made pursuant to the
Registration Statement for 15 consecutive business days or a
total of 25 business days during any 12 month period, a penalty
of two (2%) percent per month on the Stated Value of any shares of A
Preferred Stock issued and outstanding is to be paid to the
holders until any such failure is cured.
Liquidated Damages for Failure to
Deliver Shares on Time: Damages for failure to timely deliver common stock issuable upon
conversion of the A Preferred Stock up to $10 per trading day for each
$2,000 in value of shares of common stock underlying the A Preferred Stock
increasing to $20 per trading day for continuing failures.
Other: No issuances of common stock that would cause a older to own more
than 4.9% of our total common stock at any given time;
Certain Definitions.
"Change of Control" includes the following: (a) a change in ownership
of in excess of 40% of our voting securities within a year; (b) the replacement
within a year of more than one-half of the members of the Board of Directors
which is not approved by a majority of the members of the Board on April 8,
2004; or (c) our entering into an agreement providing for either (a) or (b).
26
"Principal Market" means the AMEX and shall also include the New York
Stock Exchange, the NASDAQ Small-Cap Market on the NASDAQ National Market,
whichever is at the time the principal trading exchange or market for our common
stock, based upon share volume.
"Registration Statement" means the registration statement covering the
shares of common stock underlying the shares of A Preferred Stock and the
warrants sold to the investor.
"VWAP" means, for any date, the price determined by the first of the
following clauses that applies: (a) if the common stock is then listed or quoted
on a Principal Market, the daily volume weighted average price of the common
stock for such date (or the nearest preceding date) on the Principal Market on
which the common stock is then listed or quoted as reported by Bloomberg
Financial L.P. (based on a trading day from 9:30 a.m. Eastern Time to 4:02 p.m.
Eastern Time); (b) if the common stock is not then listed or quoted on a
Principal Market and if prices for the common stock are then quoted on the OTC
Bulletin Board, the volume weighted average price of the common stock for such
date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the
common stock is not then listed or quoted on the OTC Bulletin Board and if
prices for the common stock are then reported in the "Pink Sheets" published by
the Pink Sheets LLC (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the
common stock so reported; or (d) in all other cases, the fair market value of a
share of common stock as determined by an independent appraiser selected in good
faith by the investors and reasonably acceptable to the Company.
RECENT SALES OF UNREGISTERED SECURITIES
We have sold the following securities within the past three (3) years:
A.
On April 30, 2002, we issued an aggregate of 1,700,000 shares of our
common stock to Scott Turner (850,000 shares) and Thomas Zambuto (850,000
shares) in connection with our acquisition of 81% of the capital stock of
Airgate.
B.
On November 18, 2003, we issued to the persons and entities identified
below the indicated number of shares of common stock and warrants for the
consideration indicated opposite their names below:
27
Securities
Shares of Common
Stock ("Shares")
Common Stock Purchase
Name Warrants ("Warrants") Consideration
- ---- --------------------- -------------
1. Max Communications 62,112 Shares $100,000
31,056 Warrants/1/
2. Castle Creek Technology 155,280 Shares $250,000
Partners, LLC 77,640 Warrants/1/
3. Stone Street, L.P. 124,224 Shares $200,000
62,112 Warrants/1/
4. Gamma Opportunity 62.112 Shares $100,000
Capital Partners, LP 31,056 Warrants/1/
5. Alpha Capital A.G. 62,112 Shares $100,000
31,056 Warrants/1/
6. Otape Investments, LLC 124,224 Shares $200,000
62,112 Warrants/1/
7. Bristol Investment Fund, Ltd. 186,336 Shares $300,000
93,168 Warrants/1/
8. Polaris Partners, LP 93,168 Shares $150,000
46,584 Warrants/1/
9. Insider Trend Fund, LP 77,640 Shares $125,000
38,820 Warrants/1/
10. Leo E. Mindel, Non-GST 77,640 Shares $125,000
Exempt Family Trust II 38,820 Warrants/1/
11. Cornell Capital 62,112 Shares $100,000
31,056 Warrants/1/
12. Whalehaven Fund, Ltd. 62,112 Shares $100,000
31,056 Warrants/1/
13. Greenwich Growth 62,112 Shares $100,000
Fund, Ltd. 31,056 Warrants/1/
14. Bridges & Pipes, LLC 31,056 Shares $50,000
15,528 Warrants
- ------------------
/1/ One-half of said Warrants are exercisable at $1.61 per share with the
remaining one-half of said Warrants exercisable at $2.17 per Share.
In connection with the sales described above, the registrant also issued
warrants to purchase 186,358 shares at an exercise price of $1.93 per share to
Rockwood, Inc., that is believed to be an SEC and NASD registered broker-dealer
as partial compensation for its efforts in connection with that offering.
28
C.
On November 18, 2003, the Company issued warrants to purchase an
aggregate of 100,000 shares to Duncan Capital LLC ("Duncan"), an investment
banking firm. The warrants issued to Duncan were in consideration for advice by
Duncan in connection with the offering described in "B" above. One-half of the
warrants issued to Duncan are exercisable at $0.80 per share and one-half are
exercisable at $1.20 per share.
On November 18, 2003, the registrant issued warrants to purchase an
aggregate of 200,000 shares to Strategic Growth International, Inc.
("Strategic") in consideration for future public relation services to be
performed by Strategic. Such amount subsequently was reduced to 50,000 shares.
D.
On April 14, 2004, pursuant to a Securities Purchase Agreement dated as
of April 8, 2004 with Crestview Capital Master, LLC ("Crestview") and Midsummer
Investment, Ltd. ("Midsummer"), two institutional investors, we sold (the "April
Offering") to them $3,000,000 in aggregate amount of our A Preferred Stock
(2,000 and 1,000 shares of A Preferred Stock, respectively). In connection with
that sale, we also issued to these two investors warrants to purchase 937,500
shares of common stock at per share exercise prices of $1.76 for 468,750 shares
and $2.00 for 468,750 shares. In connection with the April Offering, we paid
commissions of seven (7%) percent of the gross proceeds and issued warrants to
purchase 145,833 shares of common stock to Pacific Summit Capital and/or Pacific
Summit Securities, that are believed to be SEC and NASD registered
broker/dealers.
On May 7, 2004, pursuant to a Securities Purchase Agreement with
Midsummer dated as of May 6, 2004, we sold (the "May Offering") to Midsummer
$2,000,000 aggregate amount of our A Preferred Stock. In the May Offering, we
also issued to Midsummer, warrants to purchase 625,000 shares of common stock at
per share exercise prices of $1.76 for 312,500 shares and $2.00 for 312,500
shares. In connection with the May Offering, we made payments equal to eleven
(11%) percent of the gross proceeds received in the May Offering, and issued
warrants to purchase 70,000 shares of our common stock to entities also believed
to be SEC and NASD registered broker-dealers or their affiliates.
E.
In June 2004, we issued 100,000 warrants to affiliates of a financial
services provider.
The Company believes that the foregoing sales of its securities were
exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) and not involving a public offering.
Additionally, with respect to the investors enumerated in "B" and "D," reliance
is also placed on Sections 4(1) and 4(6) of that Act, as all investors were
believed to be accredited investors based upon information provided by the
investor and (2) Rule 506 of Regulation D, promulgated under Section 4(2) of
that act as the investors represented that they were acquiring the securities
for investment not with a view to distribution thereof. In addition, the
certificates evidencing such securities bear restrictive legends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information about the Company's common
stock that may be issued upon the exercise of stock options under all of our
equity compensation plans in effect as of December 31, 2004.
29
Number of securities
remaining available for
Number of securities to Weighted average future issuance under
be issued upon exercise exercise price of equity compensation
of outstanding options, outstanding options, plan (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ------------- ------------------- ------------------- ------------------------
(a) (b) (c)
Equity compensation plan
approved by securityholders 200,000 $0.098 1,092,450(1)
Equity compensation plan not
approved by securityholders 0 $0.00 0
- --------------------------
(1) The number of securities represents 1,092,450 shares available for
issuance under the Company's 2000 Stock Plan. For additional
information concerning the Company's 2000 Stock Plan, see the
discussion in Note 12 entitled, "Stock Plan" of the Notes to
Consolidated Financial Statements.
Our Stock Option Plan provides for a proportionate adjustment to the number of
shares reserved for issuance in the event of any stock dividend, stock split,
combination, recapitalization, or similar events.
Other Stock Grants
On or about November 7, 2003, we entered into four service agreements
with three employees and an independent sales representative. Under the terms of
the agreements, as amended in March 2004, we granted these employees and the
sales representative an aggregate of 1,950,000 shares of our common stock. The
shares are restricted as they have not been registered with the Securities and
Exchange Commission (the "SEC" or the "Commission"). The agreements with the
employees, as amended, require two of them to continue to provide services to us
from January 1, 2004 through December 31, 2013 and one of them to provide
services to us from January 1, 2004 through December 31, 2008. The agreement
with the sales representative requires him to provide services to us from
January 1, 2004 through December 31, 2005. However, in December 2004, one of the
employees resigned and, by mutual agreement, she surrendered her 850,000 shares.
The independent sales representative agreed to surrender his 200,000 shares in
exchange for $50,000 in cash, payable during his two-year services agreement
expiring at December 2005. The surrenders occurred in 2004 but the actual
cancellation of the 1,050,000 shares was not accomplished until late March 2005.
All calculations of the issued and outstanding shares of common stock contained
in this Form 10-K do not give effect to that cancellation. The service agreement
related compensation costs were reversed during the fourth quarter of Fiscal
2004.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
The selected consolidated income statement data for the years ended
December 31, 2004, 2003 and 2002, and the selected consolidated balance sheet
data as of December 31, 2004 and 2003 set forth below are derived from our
audited consolidated financial statements included in this Annual Report and
should be read in conjunction with, and are qualified in their entirety by
reference to such financial statements, including the notes thereto and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected consolidated income statement data for the years ended
December 31, 2001 and 2000 and the selected consolidated balance sheet data as
of December 31, 2002, 2001 and 2000 set forth below are derived from audited
consolidated financial statements of the Company which are not included herein.
30
STATEMENT OF OPERATIONS DATA
December 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
FREIGHT FORWARDING INCOME $ 99,600,454 $ 73,093,164 $ 52,903,737 $ 13,788,479 $ 14,169,226
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of forwarding 4,821,796 62,540,068 45,005,074 11,054,263 11,290,129
General and administrative 13,175,477 9,840,487 6,081,751 2,274,393 1,822,369
Depreciation and amortization 780,022 762,367 589,523 200,887 107,296
Stock-based compensation cost
286,247 111,143 70,075 38,835 --
------------ ------------ ------------ ------------ ------------
99,063,542 73,254,065 51,746,423 13,568,378 13,219,794
------------ ------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 536,912 (160,901) 1,157,314 220,101 949,432
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 302,624 238,361 151,520 68,699 64,725
Interest expense (313,920) (228,178) (96,420) (24,123) (5,304)
Gain on disposal of subsidiary -- -- 11,390 19,729 --
Settlement of litigation -- -- (257,500) -- --
Exchange listing costs -- (242,606) -- -- --
Withdrawn registration statement
costs -- (171,120) -- -- --
Preferred stock dividend and
amortization of deferred financing (546,494) -- -- -- --
costs
Amortization of preferred stock
discount (168,312) -- -- -- --
Equity in income of affiliate
8,823 -- -- -- --
Other -- -- -- (40,545) --
------------ ------------ ------------ ------------ ------------
(717,279) (403,543) (191,010) 23,760 59,421
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
(180,367) (564,444) 966,304 243,861 1,008,853
PROVISION FOR INCOME TAXES
(BENEFIT) (488,697) (572,933) 263,454 68,911 167,655
INCOME BEFORE MINORITY INTEREST
308,330 8,489 702,850 174,950 841,198
MINORITY INTEREST 19,197 -- -- -- --
------------ ------------ ------------ ------------ ------------
NET INCOME 327,527 8,489 702,850 174,950 841,198
------------ ------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE (1) $ 0.01 $ 0.00 $ 0.03 $ 0.01 $ 0.05
------------ ------------ ------------ ------------ ------------
DILUTED EARNINGS PER SHARE (2) $ 0.01 $ 0.00 $ 0.03 $ 0.01 $ 0.05
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA
December 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents $ 1,538,146 $ 912,240 $ 441,657 $ 841,472 $ 2,345,816
Restricted cash 5,088,088 5,786,064 2,655,589 1,450,896 --
Total assets 31,290,342 22,387,280 16,652,194 6,707,620 5,888,758
Capital leases obligation,
non-current portion 64,373 21,592 37,820 19,961 28,767
Total liabilities 21,630,605 14,532,680 10,897,005 3,155,981 2,373,741
Stockholders' equity 9,659,737 7,854,600 5,755,189 3,551,639 3,515,017
31
- -------------
(1) Based on weighted average basic shares outstanding of 25.9 million, 22.8
million, 21.6 million, 20.9 million and 18.2 million for 2004, 2003, 2002,
2001 and 2000, respectively.
(2) Based on weighted average diluted shares outstanding of 26.1 million, 22.8
million, 21.7 million, 21.0 million and 18.2 million for 2004, 2003, 2002,
2001 and 2000, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Special Note Of Caution Regarding Forward-Looking Statements
Certain statements in this report, including statements in the
following discussion, which are not statements of historical fact, are what are
known as "forward-looking statements," which are basically statements about the
future. For that reason, these statements involve risk and uncertainty since no
one can accurately predict the future. Words such as "plans," "intends,"
"hopes," "seeks," "anticipates," "expects," and the like, often identify such
forward-looking statements, but are not the only indication that a statement is
a forward-looking statement. Such forward-looking statements include statements
concerning our plans and objectives with respect to the present and future
operations of the Company, and statements, which express or imply that such
present and future operations will, or may, produce revenues, income or profits.
Numerous factors and future events could cause the Company to change such plans
and objectives, or fail to successfully implement such plans or achieve such
objectives, or cause such present and future operations to fail to produce
revenues, income or profits. Therefore, the reader is advised that the following
discussion should be considered in light of the discussion of risks and other
factors contained in this report on Form 10-K and in the Company's other filings
with the SEC. No statements contained in the following discussion should be
construed as a guarantee or assurance of future performance or future results.
These forward-looking statements are based largely on our current
expectations, assumptions, plans, estimates, judgments and projections about our
business and our industry, and they involve inherent risks and uncertainties.
Although we believe that these forward-looking statements are based upon
reasonable estimates, judgments and assumptions, we can give no assurance that
our expectations will in fact occur or that our estimates, judgments or
assumptions will be correct, and we caution that actual results may differ
materially and adversely from those in the forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties,
contingencies and other factors that could cause our or our industry's actual
results, level of activity, performance or achievement to differ materially from
those discussed in or implied by any forward-looking statements made by or on
behalf of us and could cause our financial condition, results of operations or
cash flows to be materially adversely affected. Accordingly, investors and all
others are cautioned not to place undue reliance on such forward-looking
statements.
32
Potential risks, uncertainties, and other factors which could cause the
Company's financial performance or results of operations to differ materially
from current expectations or such forward-looking statements include, but are
not limited to:
- International economic and political risks, over which we have little
or no control;
- Political uncertainty in Hong Kong and China making it difficult to
develop any long range planning;
- Relations between the United States and China remaining stable;
- The Chinese government could change its policies toward private
enterprises or expropriate private enterprises;
- The lack of adequate remedies and impartiality under China's legal
system may adversely impact our ability to do business and enforce our
agreements with third parties;
- Fluctuations in exchange rates;
- Our dependence on third parties for equipment and services;
- Competition from our own cargo agents;
- Having seasonal business that causes fluctuations in our results of
operations and financial condition;
- A lack of ongoing contractual relationships with our customers;
- Taking on significant credit risks in the operation of our business as
East Coast U.S. freight forwarders expect us to offer thirty days
credit from the time of cargo delivery;
- Our inventory of shipping space is subject to the significant risk
that we may not be able to "fill" the space while having contracted
for that space, and
- Our insurance may not be sufficient to cover losses or damages to the
freight we ship or for consequential damages for a shipment of
hazardous materials.
Many of these factors are beyond our control, and you should read
carefully the factors described in "Risk Factors" in our filings (including its
Forms 10-K and registration statements) with the Securities and Exchange
Commission for a description of some, but not all, risks, uncertainties and
contingencies. These forward-looking statements speak only as of the date of
this document. We do not undertake any obligation to update or revise any of
these forward-looking statements to reflect events or circumstances occurring
after the date of this document or to reflect the occurrence of unanticipated
events. Any forward-looking statements are not guarantees of future performance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results
of operations are based upon our consolidated financial statements. These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. These principles require management to
make certain estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, based on historical experience, and various other assumptions that
33
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
The following critical accounting policies rely upon assumptions,
judgments and estimates and were used in the preparation of our consolidated
financial statements:
RECOGNITION OF COST OF FORWARDING
The billing of cost of forwarding is usually delayed. As a result, we
must estimate the cost of purchased transportation and services, and accrue an
amount on a load-by-load basis in a manner that is consistent with revenue
recognition. Such estimate is based on past trends, and on the judgment of
management. Historically, upon completion of the payment cycle (receipt and
payment of transportation bills), the actual aggregate transportation costs are
not materially different than the accrual. However, in any case in which the
actual cost varies significantly from the accrual, a revision to the accrual
would be required.
ACCOUNTING FOR INCOME TAXES
In preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions where we operate. This
process involves estimating actual current tax exposure, together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be recovered from future
taxable income, and to the extent that we believe that recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation
allowance, we must include an expense within the tax provision of the
consolidated statement of income in each period in which the allowance is
increased.
Significant judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities, and any valuation allowance,
against our deferred tax assets. In the event that actual results differ from
these estimates or the estimates are adjusted in future periods, then we may
need to establish an additional valuation allowance, which could materially
impact our financial position and results of operations. Based on our current
financial projections, we currently believe that we will realize 100% of our
deferred tax assets.
VALUING LONG-LIVED ASSETS, INTANGIBLES AND GOODWILL
We assess the impairment of identifiable long-lived assets purchased
intangible assets and goodwill whenever events or changes in circumstances
indicate that the carrying amount may be impaired. Factors that we consider when
evaluating for possible impairment include the following:
- Significant under-performance relative to expected historical or
projected future operating results;
- Significant changes in the manner of our use of the acquired assets or
the strategy for our overall business; and
- Significant negative economic trends.
When determining whether the carrying value of long-lived assets and
goodwill is impaired based upon the existence of one or more of the above
factors, we determine the existence of impairment by comparison of the carrying
amount of the asset to expected future cash flows to be generated by the asset.
If such assets are considered impaired, the impairment is measured as the amount
by which the carrying value of the assets exceeds their fair values. As of
December 31, 2004, goodwill totaled approximately $2.74 million, other
intangible assets amounted to approximately $1.36 million and our long-lived
assets, consisting primarily of net property, plant and equipment, totaled
$619,753.
34
As required by SFAS No. 142, "Goodwill and other Intangible Assets,"
goodwill and other intangible assets with indefinite lives are no longer
amortized, but rather are to be tested at least annually for impairment. This
pronouncement also requires that intangible assets with definite lives be
amortized over their respective lives to their estimated residual value and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". During the period from 2002 and
2004, we acquired the below companies and recorded goodwill and intangibles
associated with these acquisitions. It is summarized as follows:
Date of Acquisition Name of Company Acquired Goodwill Intangible assets
(recorded at the time (Customer relationships)
of Acquisition)
- ----------------------------------------------------------------------------------------------------------------
April 30, 2002 Airgate International Corp. $2.68 million $2.86 million
April 30, 2004 Paradigm International Inc. $20,248 $26,708
April 1, 2004 Shanghai Air Cargo Ground $36,492 $-
Handling Services Ltd
The acquisitions of Airgate International Corp. and Paradigm
International Inc. were recorded using the purchase method of accounting in
accordance with SFAS No. 141, while the acquisition of Shanghai Air Cargo Ground
Handling Services Ltd. was recorded under the equity method of accounting in
accordance with APB Opinion No. 18 "The Equity Method of accounting for
investment in Common Stock." We allocated the purchase price to the assets,
liabilities, intangibles and goodwill acquired, based on the fair value at the
date of acquisition.
The intangible customer relationship assets are amortized over a period
of five years while goodwill is not amortized, but rather is tested annually for
impairment in accordance with SFAS No. 142. The above acquisitions were
accounted for in accordance with SFAS 141, and the results of operations of each
company since the date of acquisition, and its financial condition as of each
balance sheet date are reflected in our condensed consolidated financial
statements. All significant inter-company balances and transactions have been
eliminated in consolidation.
OVERVIEW
The Company does not carry on any business activities by itself.
Instead, through its Hong Kong based subsidiary, AGI Logistics (HK) Ltd.
("AGI"), and its New York based subsidiary, Airgate International Corp.
("Airgate"), the Company facilitates and provides supply chain management
solutions, contract logistics services and international freight forwarding
services.
The Company's wholly owned subsidiary, AGI Logistics (HK) Ltd. ("AGI"),
operates an integrated logistics and freight forwarding business which is based
in Hong Kong. The principal services provided by AGI are air freight forwarding,
ocean freight forwarding, and warehousing which primarily handles the delivery
of goods from South China and Hong Kong to overseas countries, mainly the Far
East region and the United States. In the Far East region, Mainland China is the
target market for AGI to expand.
35
The business of AGI was first established in August 1998 and now
consists of its own operations, as well as those of its subsidiaries. On January
1, 2001, its Hong Kong incorporated subsidiaries included Sparkle Shipping,
Godown, Wharf & Transp. Co., Ltd. ("Sparkle"), Shenzhen Careship International
Transportation Ltd. ("SZ Careship"), formerly known as Guangzhou Huasheng Int'l
Forwarding Ltd., and AGI Logistics (Shenzhen) Ltd. ("AGI (Shenzhen)") which was
incorporated in The People's Republic of China ("the PRC"). AGI (Shenzhen) and
Sparkle were disposed of by AGI Group on May 11, 2001 and April 2, 2002,
respectively, in conjunction with the decision by AGI to concentrate on the
international freight forwarding business. The business activities of Sparkle
were concentrated on local feeder voyages and trucking operations in the Jujiang
Delta Area of Mainland China. In order to maintain its competitive position,
management determined it would need to purchase its own boats and trucks. As a
result, Sparkle's business operations diverged from the AGI's non-asset based
strategic plan and AGI decided to dispose of it, in order to concentrate AGI's
resources as well as investments on the operations of AGI and SZ Careship
intending to improve the tonnage performance in Hong Kong, South China, U.S. and
Europe.
On April 30, 2002, the Company completed the acquisition of Airgate, a
privately held New York based freight forwarder that was established in 1995.
Airgate is a non-asset based logistics services company which primarily handles
the air and ocean import shipments from the Far East and Southwest Asia to the
U.S. Pacific CMA International, LLC, a Colorado limited liability company that
is wholly owned by the Company, acquired 81% of the issued and outstanding
common stock of Airgate.
On April 30, 2004, the Company completed the acquisition of Paradigm
International Inc. ("Paradigm"). Paradigm is a non-asset based logistics
services company based in Miami, Florida. It primarily handles air and ocean
shipments in Latin America.
In April 2004, Shanghai Air Cargo Ground Handling Services Ltd.
("Shanghai Air Cargo"), that is 35% owned by the Company, commenced its
operation. Shanghai Air Cargo is located in Pudong International Airport,
Shanghai, PRC, and is responsible for the ground handling of air cargo in the
airport.
At July 1, 2004, the Company acquired 60% of the outstanding stock of
AGI Freight Singapore Pte Ltd. ("AGI Singapore"). AGI Singapore is a non-asset
based logistics services company based in Singapore, which handles both air and
ocean shipments all over the world.
In October 2004, the Company acquired 40% of the outstanding stock of
Vantage Point Services Limited ("Vantage Point"). Vantage Point is also a
non-asset based logistics services company based in Hong Kong, which handles
both air and ocean shipments all over the world.
The following discussion, concerning the results of operations,
liquidity and capital resources of Pacific CMA, is based solely upon the
business operations that are carried on by the Company's subsidiaries for the
years ended, December 31, 2004 and 2003.
The following is a list of significant new developments occurring
during the year ended December 31, 2004:
- Pacific CMA's shares of common stock were listed on the
Frankfurt and Berlin Stock Exchanges and commenced trading on
January 20, 2004, under the symbol "PWZ";
- Appointment of John M. Dauernheim as Chief Operating Officer;
- Appointment of Bill Stangland as Chief Financial Officer
- Named as the Official Freight Forwarder of the ASAP global
Sourcing Show held in Las Vegas from February 22 to 25, 2004;
- Entering into contract rate agreements with three additional
airlines (Thai Airways, Singapore Airlines and Royal Brunei);
36
- Our sales and marketing team in the Europe Market is
strengthened by hiring new marketing staff in the United
Kingdom;
- Issued $5 million of 6% Convertible Preferred Stock, the
proceeds of which are intended to assist the Company maintain
its growth;
- Completed the acquisition of Paradigm International Inc., a
non-asset based logistics services company based in Miami,
Florida;
- Shanghai Air Cargo Ground Handling Services Ltd commenced its
operation;
- Acquired 60% of the outstanding common stock of AGI Freight
Singapore Pte Ltd.;
- Paradigm Global Logistics, a branch office of Paradigm
International Inc., commenced its operation in Los Angeles,
California; and
- Acquired 40% of the outstanding common stock of Vantage Point
Services Limited.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003
OVERALL RESULTS
Freight forwarders are compensated on a transactional basis for the
movement of goods and provision of related services to their customers.
Therefore, our revenue is derived from our freight forwarding services based
upon the rates that we charge our customers for the movement of their freight
from origin to destination. The carrier's contract is with us, not with our
customers. We are responsible for the payment of the carrier's charges and we
are legally responsible for the shipment of the goods. We are responsible for
any claims for damage to the goods while in transit. In most cases, we receive
reimbursement from the carriers for any claims. Since many shippers do not carry
insurance sufficient to cover all losses, we also carry insurance to cover any
unreimbursed claims for goods lost or destroyed in the event of a total loss.
Gross revenue represents the total dollar value of services we sell to our
customers. Our costs of transportation, products and handling include the direct
cost of transportation, including tracking, rail, ocean, air and other costs. We
commit to pay for space with shippers prior to receiving committed orders from
our customers. We act principally as a service provider to add value and
expertise in the procurement and execution of these services for our customers.
Therefore, our gross profits (gross revenues less the direct costs of
transportation, products, and handling) are indicative of our ability to source,
add value and resell services and products that are provided by third parties.
Total revenue for the year ended December 31, 2004 increased
approximately 36% compared with the year ended December 31, 2003, from
$73,093,164 in 2003 to $99,600,454 in 2004. The increase in revenue was
primarily the result of the organic growth of AGI and Airgate, in addition to
the inclusion of the results of the acquisition in Singapore and new operations
in Los Angeles and Miami.
Revenue derived from the operations of AGI increased approximately 53% during
2004 as compared with 2003. The significant organic growth of AGI was the result
of the following factors:
- An increase in the routed freight traffic from the existing
agency partners;
- Improvements in the agency network which enabled AGI to secure
new freight business; and
- The establishment of three additional branch offices in
Chongqing, Tianjin and Futian, PRC by Shenzhen Careship
Transportation Limited in the Mainland China, a subsidiary of
AGI, during the year. All of our operations of our former
Yantian office were combined with the nearby Futian office.
Their close proximity within the Shenzhen province made that
combination warranted.
37
The revenue of Airgate represented approximately 70% of our total
revenue for 2004. Airgate focuses its operations on the import of goods from the
Far East and deconsolidation of cargo. In order to enter new markets in the
Midwest, Airgate established a subsidiary in Chicago, Illinois in June 2002.
Revenue derived from the operation of Airgate increased approximately
19.6% for the year 2004 when compared with 2003. The increase is the result of
the effort of Airgate staff and its Chicago operation maturing.
Total revenue derived from Paradigm International Inc. and AGI Freight
Singapore Pte Ltd. amounted to approximately $5.43 million, which represents
approximately 5.5% of total revenue of the Group.
When compared with 2003, the cost of forwarding for 2004 increased
approximately 36%, from $62,540,068 in 2003 to $84,821,796 in 2004. The increase
in costs was primarily the result of the organic growth, as well as the
acquisition in Singapore and new operations in Los Angeles and Miami.
Gross profit margin for the year 2004 and 2003 were quite constant,
approximately 14.44% in 2003 and 14.84% in 2004 and gross profit (revenue minus
cost of forwarding) for the year 2004 increased 40.04%, from $10,553,096 in
2003, to $14,778,658 in 2004.
Net income for the year 2004 increased approximately 3,758%, from
$8,489 in 2003, to $327,527 in 2004. The increase in net income was due to an
organic growth of the Company. Details of expense fluctuations will be discussed
in the sections "Operating expenses" and "Non-operating expenses" respectively.
BUSINESS SEGMENT OPERATING RESULTS
The results of operations for each segment are as follows:
AIRFREIGHT OPERATIONS: Revenue from airfreight operations increased
approximately 38%, from $47,346,429 in 2003 to $65,169,422 in 2004. Airfreight
revenue for foreign operations (that includes AGI Group and AGI Singapore) was
$25,201,966, while airfreight revenue for domestic operations (that includes
Airgate and Paradigm) was $47,841,589, and offsetting inter-company transactions
totaled $7,874,133. The volumes of airfreight were improved in 2004 compared
with 2003. The increase was primarily due to (i) an increase in routing orders
from Asia to the United States as a result of new customers and agents in India,
Mombassa and Africa who joined the Group during the second half of 2003, (ii)
The operation of Airgate International Corp.(Chicago), which was established in
September 2002, is becoming more and more mature; (iii) the acquisition of
Paradigm on April 30, 2004 and it has commenced additional operations in Los
Angeles, California, in July 2004; and (iv) AGI Singapore joined the Group in
the third quarter of 2004.
Costs for the airfreight forwarding operations increased approximately
37%, from $40,350,177 in 2003 to $55,091,649 in 2004. Airfreight cost
attributable to foreign operations was $21,071,779, while airfreight cost
attributable to domestic operations was $41,894,003, and offsetting
inter-company costs were $7,874,133. Airfreight cost increase in 2004 was due to
the collection of airline surcharges for security, advance cargo manifest and
fuel. However, due to economies of scales and better use of cargo mix, gross
profit margin slightly increased from approximately 14.78% in 2003 to
approximately 15.46 % in 2004. As a result of increased revenues, overall gross
profits increased approximately 44% to $10,077,773.
38
Total segment overhead attributable to the airfreight operation
increased by approximately 13%, from $3,321,156 in 2003 to $3,736,484 in 2004,
as a result of more resources being allocated to airfreight operations. Details
regarding the increase in overhead expenses are discussed below under the
section "Non Operating Income and Expenses".
Overall, net segment income for the airfreight operation increased by
approximately 73% from $3,675,096 in 2003 to $6,341,289 in 2004. The increase in
net income was mainly the result of the organic growth as well as the inclusion
of operating results of new subsidiaries during 2004.
SEA FREIGHT OPERATION: Revenue from sea freight operations increased
approximately 34% to $34,431,032 in 2004 from $25,746,735 in 2003. Sea freight
revenue for foreign operations was $9,067,212, while sea freight revenue for
domestic operations was $26,004,022, and offsetting inter-company transactions
were $640,202. The increase in revenue was due to the contribution from the new
branch offices of Shenzhen Careship in China and the increase in quantity of
freight consolidation by Airgate Chicago.
The increase in revenue for 2004 from 2003 was due to revenues derived
from new customers in Europe. In addition, our agents in India, Japan and Turkey
introduced more customers into our network, which led to more revenue from the
Shanghai market in the second and third quarters. There was also an increment in
the quantity of freight consolidation in Chicago.
Costs for the sea freight forwarding operation increased approximately
34%, from $22,189,891 in 2003 to $29,730,147 in 2004. Sea freight costs
attributable to foreign operations were $7,334,223, while costs attributable to
domestic operations were $23,036,126, and inter-company costs were $640,202. The
gross profit margin was quite constant, approximately 13.81% in 2003 and
approximately 13.65% in 2004. As a result of increased revenues, overall gross
profits increased approximately 32%, to $4,700,885.
Total segment overhead attributable to the sea freight operation
increased approximately 27%, from $1,537,266 in 2003 to $1,951,383 in 2004.
Overall net income for the sea freight operation increased approximately 36%,
from $2,019,578 in 2003 to $2,749,502 in 2004. The increase in net income was
mainly the result of the organic growth of AGI and Airgate.
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased approximately 34%, to
$13,175,477 in 2004 from $9,840,487 in 2003. There was a significant incremental
increase in expenses for the following items in this year: sales commissions,
overseas traveling, legal and professional fees, as well as salaries and
allowance.
Sales commission: Sales commission increased approximately 56% from
$1,478,941 in 2003 to $2,305,423 in 2004. The increase is a result of increase
in freight forwarding income in 2004.
Overseas traveling: Expenses related to overseas traveling increased
approximately 29%, from $238,422 in 2003 to $307,766 in 2004. The increase in
travel expenses was mainly due to costs attributable to an increased number of
trips to the United States and United Kingdom for meetings with investment
bankers and discussions related to capital raising efforts. The number of
business trips to Mainland China, Japan, South East Asia and Europe also
increased in order to promote our freight business.
39
Salaries and allowance: Salaries and allowance increased approximately
26% from $4,418,665 in 2003 to $5,556,462 in 2004. This increase was the result
of the addition of approximately 63 staff persons during 2004 needed to keep
pace with our growth.
STOCK-BASED COMPENSATION COST
Stock-based compensation cost increased approximately 158% from
$111,143 from fiscal year 2003 to $286,247 in 2004. The increase in compensation
cost was primarily due to the issuance of a total of 1,950,000 shares of our
common stock to four employees and an independent sales representative during
2003. Compensation cost is measured at the grant date based on the estimated
fair value of the securities. It is recognized as an expense over the service
period required under the service agreements with those parties. The unearned
portion of the compensation cost related to employees is recorded in equity as
unearned compensation cost, while the unearned portion of compensation cost
related to the independent sales representative is recorded as a prepaid asset.
Details of the 1,950,000 shares are as follows:
On or about November 7, 2003, we entered into four service agreements
with three employees and an independent sales representative. Under the terms of
the agreements, as amended in March 2004, we granted these employees and the
sales representative an aggregate of 1,950,000 shares of our common stock. The
shares are restricted as they have not been registered with the Securities and
Exchange Commission (the "SEC" or the "Commission"). The agreements with the
employees, as amended, require two of them to continue to provide services to us
from January 1, 2009 through December 31, 2013 and one of them to provide
services to us from January 1, 2004 through December 31, 2009. The agreement
with the sales representative requires him to provide services to us from
January 1, 2004 through December 31, 2005. However, in December 2004, one of the
employees resigned and, by mutual agreement, she surrendered her 850,000 shares.
The independent sales representative agreed to surrender his 200,000 shares in
exchange for $50,000 in cash, payable during his two year service agreement
expiring at December 2005. The surrenders occurred in 2004 and the 1,050,000
shares are to be cancelled. All calculations of the issued and outstanding
shares of our common stock contained in this Form 10-K do not give effect to
that cancellation. The service agreement related compensation costs were
reversed during the fourth quarter of Fiscal 2004.
In March 2004, the Company granted an employee 100,000 shares of common
stock. The shares were registered with the SEC by filing a Form S-8 Registration
Statement on March 29, 2004. The employee continued to provide services to the
Company from January 1, 2004 through December 31, 2005. On September 11, 2004,
this employee resigned from the position of director but agreed to continue to
act as an independent consultant for British market development. Accordingly,
$82,500 was record as expense in 2004. This $82,500 is the estimated fair value
of the stock on the grant date.
Also in March 2004 and May 2004, the Company issued 50,000 shares of
common stock to a business advisor and 5,000 shares to an employee. The Company
recorded an expense of $64,100 which is the estimated fair value of the stock on
the grant date.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization slightly increased approximately 2% from
$762,367 in 2003 to $780,022 in 2004. The increase was mainly due to additional
computer hardware and software were purchased for the implementation of new
logistics system and office renovation at Airgate. Amortization arises from an
intangible customer relationship asset recorded in conjunction with the
acquisition of Airgate on April 30, 2002. We recorded this asset at the cost of
$2,860,000 and are amortizing it on a straight-line basis over a period of five
years. During 2004 and 2003, the amortization expense attributable to this asset
$572,000.
40
With the acquisition of Paradigm International Inc. on April 30, 2004,
we recorded an intangible customer relationship asset of $26,708. Same as
Airgate, the cost of the intangible customer relationship asset is being
amortized on a straight-line basis over a period of five years. In 2004, $3,561
was expensed as amortization.
NON OPERATING INCOME AND EXPENSES
INTEREST AND OTHER INCOME
Interest and other income increased from $238,361 in 2003 to $302,624
in 2004. Increase in Interest income was due to increase in amount received from
pledged bank deposits as a result of longer term to maturity and rise in
interest rate during second half of 2004.
INTEREST EXPENSE
Interest expense increased to $313,920 in 2004 from $228,178 in 2003.
The increase in interest expense is primarily due to an increase in short-term
working capital financing and the rise in interest rate during 2004.
PREFERRED STOCK DIVIDEND AND AMORTIZATION OF ISSUANCE COST
During April and May 2004, the Company sold to two institutional
investors $5,000,000 stated amount of its Series A Preferred Stock and issued
warrants to purchase 1,562,500 shares of common stock at an exercise price of
$1.76 per share for 718,250 shares and $2.00 per share for 718,250 shares. Such
Series A Preferred Stock is mandatory redeemable and was recorded in accordance
with Statement 150 "Accounting for Certain Financial Instruments With
Characteristics of Both Liabilities and Equity". The dividends paid and accrued
are charged to expense in the statements of income. In accordance with EITF
98-5, the intrinsic value of the beneficial conversion option of $166,666 was
recorded as additional expense and credited as additional equity in warrants
outstanding in 2004. The issuance cost related to the placement of the Series A
Preferred Stock is amortized over its term to maturity, which is four years. A
total of $172,049 was expensed during 2004.
Dividends amounting to $207,779 were paid in 2004. Of that amount,
$32,500 was paid in cash and the remaining $175,279 was paid or payable in
shares of our common stock.
AMORTIZATION OF PREFERRED STOCK DISCOUNT
In accordance with Opinion 14 "Accounting for Convertible Debt and
Debts Issued With Stock Purchase Warrants," the A Preferred Stock and the
detachable stock warrants were recorded at their relative fair values with the
value of the warrants recorded as additional equity in warrants outstanding. The
fair value of the warrants was determined based on an independent valuation.
Effectively, the A Preferred Stock was recorded at a discount of $939,713. This
discount is amortized ratably over the term of the A Preferred Stock. As a
result, $168,312 was expensed during 2004.
41
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
OVERALL RESULTS
Freight forwarders are compensated on a transactional basis for the
movement of goods and provision of related services to their customers.
Therefore, our revenue is derived from our freight forwarding services based
upon the rates that we charge our customers for the movement of their freight
from origin to destination. The carrier's contract is with us, not with our
customers. We are responsible for the payment of the carrier's charges and we
are legally responsible for the shipment of the goods. We are responsible for
any claims for damage to the goods while in transit. In most cases, we receive
reimbursement from the carriers for any claims. Since many shippers do not carry
insurance sufficient to cover all losses, we also carry insurance to cover any
unreimbursed claims for goods lost or destroyed in the event of a total loss.
Gross revenue represents the total dollar value of services we sell to our
customers. Our costs of transportation, products and handling include the direct
cost of transportation, including tracking, rail, ocean, air and other costs. We
commit to pay for space with shippers prior to receiving committed orders from
our customers. We act principally as a service provider to add value and
expertise in the procurement and execution of these services for our customers.
Therefore, our gross profits (gross revenues less the direct costs of
transportation, products, and handling) are indicative of our ability to source,
add value and resell services and products that are provided by third parties.
Total revenue for the year ended December 31, 2003 increased
approximately 38% compared with the year ended December 31, 2002, from
$52,903,737 in 2002 to $73,093,164 in 2003. The increase in revenue was
primarily the result of the organic growth of AGI and Airgate, together with the
inclusion of the full year business of Airgate in 2003, excluding the
inter-company transactions among the group companies.
During October to December 2002, the labor strike in the west coast
ports of the U.S. led to an increase in demand for airfreight services for the
last quarter of 2002. That strike led to an increase in airfreight business,
such business can be billed at a higher rate than sea freight.
Revenue derived from the operations of AGI slightly decreased
approximately 6% during 2003 as compared with 2002.
The significant organic growth of AGI was the result of the following
factors:
1. An increase in routed freight traffic from existing agency
partners;
2. An increase in the number of new overseas agency partners;
3. Improvements in the agency network which enabled AGI to secure
new freight business;
4. Entering new markets in India, Japan and Sri Lanka.
The revenue of Airgate represented approximately 73% of our total
revenue for 2003. Airgate focuses its operations on the import of goods from the
Far East. Airgate currently leases its own bonded warehouse where
deconsolidation of cargo is performed. In order to enter new markets in the
Midwest, Airgate established a new office in Chicago, Illinois in June 2002.
During the year, our cost of forwarding increased approximately 39%,
from $45,005,074 in 2002 to $62,540,068 in 2003. This increase in costs was
primarily the result of the organic growth of AGI and Airgate, together with the
inclusion of the full year business of Airgate in 2003, excluding the
inter-company transactions among the group companies.
42
Gross margin for the year was quite constant, approximately 14.93% in
2002 to approximately 14.44% in 2003 and gross profit (revenue minus cost of
forwarding) for the year increased 33.61%, from $7,898,663 in 2002, to
$10,553,096 in 2003. Overall, we realized a net income of $8,489 in 2003
compared with $702,850 in 2002.
BUSINESS SEGMENT OPERATING RESULTS
The results of operations for each segment are as follows:
AIRFREIGHT OPERATIONS: Revenue from airfreight operations increased
approximately 30%, from $36,392,050 in 2002 to $47,346,429 in 2003. Airfreight
revenue for AGI Group was $15,918,980, while airfreight revenue for Airgate was
$37,413,874, and offsetting inter-company transactions totaled $5,986,425. The
volumes of airfreight were improved in 2003 compared with 2002, but in 2003 our
results were adversely affected by both the second Gulf War and by the outbreak
of the SARS virus in Asia. Prior to the beginning of the war, importers were
concerned about the possible impact of the war on costs, and extra payments for
fuel and security. It was also expected that if war began, the space for
airfreight shipment would be decreased in order to allow for space reallocations
to the U.S. government. These factors led to an increase in air traffic prior to
the beginning of the war in the first quarter. The tonnage increase caused the
demand for shipment space to increase as well, which led to a rise in the cost
of space in the first quarter. Rate adjustments to clients were limited to
moderate levels, since customers were reluctant to absorb the whole magnitude of
the rate increase. Both the number of purchase orders and freight volumes were
decreased during the second quarter of 2003 as a result of the SARS outbreak. In
addition, the supply of cargo space was decreased dramatically as a result of
cancellation of many freighter and passenger flights, and freight costs were
maintained at a high level. Although freight volumes began to increase again in
the third quarter after the SARS outbreak was contained, the tight supply of air
space continued and our power to increase prices to our customers was limited.
Except for the SARS factor and the impact of the second Gulf War, the Company
actually experienced operating improvements in 2003 as compared to 2002. We had
more new sources of customers and agents for air-import that led to an increase
in air traffic, like those to India, and the new traffic to Mombassa, Africa.
Costs for the airfreight forwarding operations increased approximately 31%, from
$30,795,210 in 2002 to $40,350,177 in 2003. Airfreight cost attributable to AGI
Group was $13,394,194, while airfreight cost attributable to Airgate was
$33,045,858, and offsetting inter-company costs were $6,089,875. The gross
profit margin was quite constant, approximately 15.38% in 2002 and approximately
14.78 % in 2003. As a result of increased revenues, overall gross profits
increased approximately 25% to $6,996,252.
Total segment overhead attributable to the airfreight operation
increased approximately 42%, from $2,339,230 in 2002 to $3,321,156 in 2003.
Details regarding the increase in overhead expenses are discussed below under
the section title "Other Operating Expenses."
Overall, net segment income for the airfreight operation increased
approximately 13% for the year, from $3,257,610 in 2002 to $3,675,096 in 2003.
The increase in net income was mainly the result of the organic growth of AGI
and Airgate, together with the inclusion of the full year business of Airgate in
2003.
43
SEA FREIGHT OPERATION: Revenue from sea freight operations increased
approximately 56% to $25,746,735 in 2003 from $16,505,750 in 2002. Sea freight
revenue for AGI Group was $5,850,137, while sea freight revenue for Airgate was
$20,551,630, and offsetting inter-company transactions were $655,032. The
increase in revenue for the year was due to inclusion of Airgate revenues for
the full year (as compared to only eight months in 2002), and to revenues
derived from new customers in new markets. Since ocean liners proposed a general
rate increase to take effect on May 1, 2003, customers increased their shipments
in order to take advantage of lower rates in effect before the pending rate
increases. Thus ocean traffic recorded an increase in the first quarter. In
addition, our new agents in India, Japan and Turkey introduced more customers
into our network, which led to more revenue from the Shanghai market in the
second and third quarters. There was also an increment in the quantity of
freight consolidation in Chicago. The general increase of peak season surcharges
and rate adjustments by ocean liners starting May 1, 2003, resulted in an
increase in ocean traffic costs. Costs for the sea freight forwarding operation
increased approximately 56%, from $14,196,471 in 2002 to $22,189,891 in 2003.
Sea freight costs attributable to AGI Group were $4,494,984, while costs
attributable to Airgate were $18,323,872, and inter-company costs were $628,965.
The gross profit margin was quite constant, approximately 13.99% in 2002 and
approximately 13.81% in 2003. As a result of increased revenues, overall gross
profits increased approximately 54%, to $3,556,844.
Total segment overhead attributable to the sea freight operation
increased approximately 63%, from $942,973 in 2002 to $1,537,266 in 2003.
Overall net income for the sea freight operation increased approximately 48%,
from $1,366,306 in 2002 to $2,019,578 in 2003. The increase in net income was
mainly the result of the organic growth of AGI and Airgate, together with the
inclusion of the full year business of Airgate in 2003.
OTHER OPERATING EXPENSES
SELLING AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased approximately 62%, to
$9,951,630 in 2003 from $6,151,826 in 2002. The following factors caused the
increase in expenses:
There was a significant incremental increase in expenses for the
following items in this year: sales commissions, overseas traveling, legal and
professional fees, as well as salaries and allowance.
Sales commission: Sales commission increased approximately 154% from
$582,064 in 2002 to $1,478,941 in 2003. The increase is due to the inclusion of
full year result of Airgate in 2003 as compared to eight (8) months results in
2002. The increase is also a result of increase in freight forwarding income in
2003.
Overseas traveling: Expenses related to overseas traveling increased
approximately 28%, from $187,071 in 2002 to $238,422 in 2003. The increase in
travel expenses was mainly due to costs attributable to an increased number of
trips to the U.S. and Singapore for meetings with investment bankers and
discussions related to capital raising efforts. The number of business trips to
Japan, Taiwan and Europe was also increase in order to promote our freight
business.
Legal and professional fees: Total legal fees incurred increased
approximately 274%, from $242,625 in 2002 to $907,463 in 2003. The increase in
legal fees was primarily the result of matters related to working on a
registration statement and work related to potential listing of our shares on a
stock exchange.
44
Salaries and allowance: Salaries and allowance increased approximately
51% from $2,935,449 in 2002 to $4,418,665 in 2003. This increase was the result
of the addition of approximately 23 staff persons during 2003 needed to keep
pace with our growth. Again, the inclusion of a full year of Airgate's operation
in 2003 was a significant factor in the increase in salaries.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased approximately 29% from $589,523
in 2002 to $762,367 in 2003 The increase is attributable to the full year
amortization of an intangible customer relationship asset recorded in
conjunction with the acquisition of Airgate on April 30, 2002, when comparing
with only eight months in 2002. We recorded this asset at cost ($2,860,000) and
it is being amortized on a straight-line basis over a period of 5 years. During
2003, the amortization expense attributable to this asset was $572,000.
NON-OPERATING INCOME
INTEREST AND OTHER INCOME
Interest and other income increased from $151,520 in 2002 to $238,361
in 2003. This was due to the interest income from loan receivables and
management fee income received from third parties.
INTEREST EXPENSE
Interest expense increased to $228,178 in 2003 from $96,420 in 2002.
The increase in interest expense is primarily due to an increase in short-term
working capital financing.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
OVERALL RESULTS
Total revenue for the year ended December 31, 2002 increased
approximately 284% as compared with the year ended December 31, 2001, from
$13,788,479 in 2001 to $52,903,737 in 2002. The increase in revenue was due to
(i) organic growth of AGI and (ii) inclusion of Airgate's revenues commencing
May 1, 2002, excluding the inter-company transactions among the group companies.
Revenue derived from operations of AGI increased 67.2% as compared to
2001. This significant organic growth is the result of the following factors:
An increase in routed freight traffic from existing agency partners;
An increase in the number of new overseas agency partners;
An increase in the number of sales and marketing staff;
Improvements in the agency network, which enabled AGI to secure new
freight business;
Positive effects of the west coast dock worker's strike in U.S.;
Exploring new markets in U.A.E., Dubai, India, Japan, Singapore,
Australia and Thailand.
45
The revenue of Airgate represents approximately 70% of our total
revenue for 2002. Airgate focuses its operations on the import of goods from the
Far East. Airgate currently leases its own bonded warehouse where
deconsolidation of cargo is performed. In order to explore new markets in the
Midwest, Airgate established a new office in Chicago, Illinois in June 2002.
Our cost of freight forwarding increased approximately 307%, from
$11,054,263 in 2001 to $45,005,074 in 2002. This increase in costs was due to
the organic growth of AGI and the inclusion of Airgate freight costs commencing
in May 2002.
Gross margin decreased from approximately 19.83% in 2001 to
approximately 14.93% in 2002 and gross profit (revenue minus cost of forwarding)
increased approximately 189%, from $2,734,216 in 2001, to $7,898,663 in 2002.
Overall, we realized a net income of $702,850 in 2002 compared to $174,950 in
2001.
The decrease in overall gross margins was mainly due to lower gross
margins attributable to existing Airgate operations. However, since completing
the Airgate acquisition, the Company has been working to improve Airgate's
profit margin through synergies between it and AGI. Airgate is also putting
substantial effort into finding new customers with the potential for higher
profit margins to the Company, and has increased its marketing staff in an
effort to develop new markets with higher gross margins.
BUSINESS SEGMENT OPERATING RESULTS
The results of operations for each segment are as follows:
Airfreight operations: Revenue from airfreight operations increased
approximately 269% from $9,870,536 in 2001 to $36,392,050 in 2002. Airfreight
revenue for AGI Group was $18,458,518, while airfreight revenue for Airgate was
$25,710,558, and off-setting inter-company transactions totaled $7,777,026. The
volume of airfreight was improved in 2002 compared with 2001. Our main customer
base is in the garment industry, which prefers airfreight to sea freight
transportation. In the aftermath of the September 11 attacks, inventory levels
in the U.S. were generally low in the first half of 2002. As a result, the
demand for urgent shipments increased during that period, especially from the
garment industry. Another important event during 2002 was the labor strike in
the west coast ports of the U.S. from October to December of that year. This
strike led to an increase in demand for airfreight services during the last
quarter of that year. The tonnage increase caused the demand for shipment space
to increase as well, which led a rise in the cost of space. However, rate
adjustments to clients were limited to moderate levels since customers were
reluctant to absorb the whole magnitude of the rate increase. Costs for the
airfreight forwarding operations increased approximately 288% from $7,938,785 in
2001 to $30,795,210 in 2002. Airfreight costs attributable to AGI Group were
$15,396,879, while airfreight cost attributable to Airgate was $23,114,955, and
off-setting inter-company costs were $7,716,624. As a result of the increase in
cost for space, the gross profit margin decreased from approximately 20% in 2001
to approximately 15% in 2002. However, as a result of increased revenues,
overall gross profits increased approximately 190% to $3,665,089.
Total segment overhead attributable to the airfreight operation
increased from $809,326 in 2001 to $2,339,230 in 2002. Details regarding the
increase in overhead expenses are discussed below under the section title "Other
Operating Expenses."
Overall, net segment income for the airfreight operation increased
approximately 190% for the year, from $1,122,515 in 2001 to $3,257,610 in 2002.
The increase in net income was mainly the result of the inclusion of Airgate's
business and the improvement in the results of the AGI Group.
46
Sea freight operation: Revenue from sea freight operations increased
approximately 333% to $16,505,750 in 2002 from $3,814,375 in 2001. Sea freight
revenue for AGI Group was $4,590,497, while sea freight revenue for Airgate was
$12,467,747, and off-setting inter-company transactions were $552,494. The
increase in revenue was due to inclusion of Airgate revenues and revenues
derived from new customers in new markets. Profitable loose freight
consolidation shipments to Australia and U.S. were increased during the year.
Costs for the sea freight forwarding operation increased approximately 370% from
$3,020,131 in 2001 to $14,196,471 in 2002. Sea freight costs attributable to AGI
Group were $3,383,618, while costs attributable to Airgate were $11,342,135, and
inter-company costs were $529,282. As a result, the gross profit margin
decreased from approximately 21% in 2001 to approximately 14% in 2002. However,
as a result of increased revenues, overall gross profits increased approximately
191% to $1,515,035.
Total segment overhead attributable to the sea freight operation was
increased by approximately 166%, from $354,140 in 2001 to $942,973 in 2002.
Overall net income for the sea freight operation increased approximately 210%,
from $440,104 in 2001 to $1,366,306 in 2002. The increase in net income was
mainly the result of inclusion of Airgate's operations and the improvement in
the results of the AGI Group.
OTHER OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased approximately 166% to
$6,151,826 in 2002 from $2,313,228 in 2001. The following factors caused the
increase in expenses:
Overseas traveling: Expenses related to overseas traveling increased
approximately 152% from $74,148 in 2001 to $187,071 in 2002. The increase in
travel expenses was mainly due to costs attributable to and an increased number
of trips to the US for meetings with investment bankers and discussions related
to capital raising efforts.
Salaries and allowance: Salaries and allowances for the period
increased approximately 180% from $1,049,468 in 2001 to $2,935,449 in 2002. The
salaries and allowances attributable to the AGI Group were $1,478,237, while
those attributable to Airgate were $1,457,212 for the year of 2002. There were
increased numbers of employees for the sales and marketing department and the
accounting department during the year 2002.
DEPRECIATION AND AMORTIZATION
There was a significant increase in depreciation and amortization
expense in 2002 which is attributable to the amortization of an intangible
customer relationship asset recorded in conjunction with the acquisition of
Airgate on April 30, 2002. We recorded this asset at cost ($2,860,000) and it is
being amortized on a straight-line basis over a period of 5 years. During the
year ended December 31, 2002, the amortization expense for this asset was
$381,333.
NON-OPERATING INCOME
INTEREST AND OTHER INCOME
Interest and other income increased from $68,699 in 2001 to $151,520 in
2002. This was due to the interest income from loan receivables and management
fee income received from third parties.
47
INTEREST EXPENSE
Interest expense increased to $96,420 in 2002 from $24,123 in 2001. The
increase in interest expense is due primarily to the increase in short-term
working capital financing.
RISK FACTORS AFFECTING COMPANY OPERATIONS
The Company's ability to provide service to its customers is highly
dependent on good working relationships with a variety of entities such as
airlines, steamship carriers and governmental agencies.
Unlike other U.S. logistics companies, the Company bears a significant
amount of inventory risk. We pay for the guarantees we put up to the carriers,
even if we do not have any customer cargo to fill the space. We are not able to
ask our clients to make these guarantees and, accordingly, we assume all of the
risks.
The Company has freight forwarders liability insurance that covers it
against claims from clients. We take responsibility for the cargo, and we are
responsible for its safe delivery. Therefore, we can be held responsible and
incur losses if anything goes wrong.
Changes in governmental deregulation efforts, regulations governing the
Company's products, and/or the international trade and tariff environment could
all affect the Company's business in unpredictable ways.
Management believes the Company's business has not been significantly
or adversely affected by inflation in the past. Historically, the Company has
generally been successful in passing cost increases to its customers by means of
price increases. However, competitive market place conditions could impede the
Company's ability to pass on future cost increases to customers and could erode
the Company's operating margins.
The Company continues to assess and improve financial controls, and has
negotiated successfully with its banks to get credit facilities for future
financial needs.
Additional risks and uncertainties include:
1. Governmental deregulation efforts, regulations governing the Company's
products and/or the international trade and tariff environment adversely
affecting our ability to provide services to customers.
2. Competitive marketplace conditions impeding the ability of the Company to
pass future cost increases to customers.
3. Dependence of the Company on international trade resulting from favorable
worldwide economic conditions.
4. Dependence of the Company on retention and addition of significant customers.
5. The ability to recruit and retain skilled employees in a tight labor market.
6. The ability of the Company to develop and implement information systems to
keep pace with the increasing complexity and growth of the Company's business.
48
7. Following the September 11, 2001 attacks, airlines passed on additional costs
such as a fuel, insurance and war risk surcharges. These surcharges are
generally passed through to shippers and consignees, which increases their
shipping costs. As a result of these increased costs, the shipping incentive of
customers has been reduced, and the rate of order cancellation has increased.
8. During March of 2003, The World Health Organization received reports of
'Severe Acute Respiratory Syndrome' in various parts of the world. SARS caused
airlines to reduce capacity and adversely affected external trade from Hong Kong
and the Pearl River Delta. The Company's operations were adversely affected by
this health problem.
LIQUIDITY AND CAPITAL RESOURCES
We (used) generated approximately ($3,500,000), ($1,300,000) and
$1,200,000 of cash from operating activities in 2004, 2003 and 2002,
respectively. This increase in the use of cash was mainly attributable to
additional amounts used in accounts and other receivables. It is also due to an
increase in deferred tax assets.
Net cash used in investing activities was $774,845, $295,381 and
$497,290 in 2004, 2003 and 2002, respectively. We used $428,085 to acquire plant
and equipment to improve our office facilities, and used $136,101 for the
deposits of a potential equity investment. We also used $286,647 for equity
investment in an affiliate. We received payment of a loan receivable in the
amount of $17,620, and we received $13,122 from the disposal of property and
equipment.
Net cash provided by (used in) financing activities was $4,908,197,
$2,017,374 and ($1,120,337) in 2004, 2003 and 2002 respectively. We made
payments on short-term debt to banks of $562,373 and principal payment under
capital lease obligations of $52,978. At the same time we also issued $5 million
of our A Preferred Stock and warrants. In order to extend our banking
facilities, an additional $697,976 was pledged to the banks as restricted cash
deposits. Notes payable to the banks increase by $670,812 during 2004,
Working capital was $6,260,963 (inclusive of restricted cash of $5.1
million) and $1,850,649 as of December 31, 2004 and December 31, 2003
respectively. We believe that we will be able to rely on cash flow from
operations for short-term liquidity, and also believe that we have adequate
liquidity to satisfy our material commitments for the twelve months following
December 31, 2004. We also believe that we can obtain additional liquidity
through further negotiation of short-term loans from banks to satisfy our
short-term funding needs, if any.
We intend to continue our expansion plans through a mixture of organic
growth and acquisitions. Future acquisitions will focus on companies that serve
as freight forwarders in key markets or offer services (such as customs
brokerage) that complement our existing services. We intend to achieve organic
growth through the establishment of new branch offices in Latin America, joint
ventures in the PRC and through a major marketing campaign through the Indian
subcontinent, including India, Sri Lanka and Bangladesh. In order to achieve
this goal, we will be required to raise a certain amount of capital. To a
certain extent, these activities will have a significant impact on both
liquidity and capital resources.
49
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENT
We have entered into various contractual obligations, which may be
summarized as follows:
Payments Due by Period
-----------------------------------------------------------
Contractual Obligations Total Less than 1 1-3 years 4 - 5 years Thereafter
year
--------------------------------------------------------------------------
$ $ $ $ $
Capital Lease Obligations 126,910 62,537 64,373 - -
Operating Leases 1,636,799 612,329 1,003,844 20,626 -
Cargo Space Commitments 4,534,704 4,534,704 - - -
Material Employment 499,000 499,000 - - -
Agreements
Series A Preferred Stock and 6,031,667 304,168 5,727,499 - -
Cumulative Dividends
We have financed lease obligations of $126,910 as of December 31, 2004,
of which $62,537 is repayable within one year, and $64,373 is repayable after
one year.
We also entered into various lease commitments for office premises and
warehouses in the United States, Hong Kong and China. The total outstanding
lease commitments under non-cancelable operating leases are $1,636,799 as of
December 31, 2004. As of December 31, 2004, the current portion of these
commitments of $612,329 is payable within one year.
We have entered into written agreements with various sea and airfreight
carriers committing to take up a guaranteed minimum amount of cargo space each
year. As of December 31, 2004, the amount outstanding for such commitments to be
entered in 2005 was approximately $4.5 million.
In connection with the acquisition of Airgate International
Corporation, we also entered into three-year employment agreements, dated April
30, 2002, with Mr. Turner and Mr. Zambuto, respectively, as described in a
Current Report on Form 8-K filed on May 14, 2002. Under these agreements, we
agreed to pay each of them an annual base salary of $249,500 per annum
commencing January 1, 2003, and for each year thereafter during the term of
their employment agreements.
As of December 31, 2004, our commercial commitments may be summarized
as follows:
50
Other Commercial Total Amounts Amount of Commitment Expiration Per Period
Commitments Committed
- --------------------------------------------------------------------------------------------
Less than 1 year 1-3 years
---------------- ---------
Line of credit $2,500,000 $2,500,000 $-
Overdraft 1,818,713 1,818,713 -
Invoice Trust Receipt 2,360,693 2,360,693 -
Guarantees by bank 578,410 578,410 -
Capital Lease Obligations 126,910 62,537 64,373
As of December 31, 2004, to finance our working capital, our available
banking facilities were approximately $7,210,000 obtained from creditworthy
commercial banks in Hong Kong and $2,500,000 from a bank in the U.S. As of that
date, the total amount of bank credit facilities utilized was $6,679,406. This
was made up of (i) $1,818,713 of overdrafts; (ii) $2,360,693 of invoice trust
receipts and (iii) $2,500,000 line of credit. In additions, there are $578,410
of bank guarantees for granting credit facilities to a subsidiary for airfreight
payment. While these banks are not obligated to advance any further funds to us,
we believe that absent any significant downtrend in business, these sources of
credit will continue to be available to us.
OUTLOOK
Despite a global economic downturn, we believe the following factors
may have a positive impact on our future results of operation and our financial
conditions:
China's Increased Exports
According to a recent research report issued by Barrow Street Research,
Inc. (the "Barrow Report") between 1990 and 2003, China's total exports grew
eight times to over $380 billion. China's share of global exports is anticipated
to reach 6% in 2003, a 54% growth from 2000. The Barrow Report also states that
China accounted for 16% of the growth in the world economy, ranking second only
to the US. The rising trading power of China has been especially important for
transportation companies. With extensive operational centers based in Hong Kong
and South China, management believes the Company is well positioned to take
advantage of this rapid growth in trade
Closer Economic Partnership
The Closer Economic Partnership Arrangement ("CEPA") that was signed on
June 29, 2003, originally focused on stimulating and enhancing Hong Kong's
economic recovery. In theory, CEPA significantly lowers the barriers for Hong
Kong enterprises to tap the Mainland China market.
Under the CEPA, Hong Kong companies are permitted to set up wholly
owned enterprises in Mainland China to provide logistics services and related
consultancy services for ordinary road freight, and to engage in the management
and operation of logistics services through electronic means. It permits freight
forwarding agents to operate in Mainland China on a wholly owned basis a full
two years ahead of China's WTO entrance timetable, and will permit such agents
to enjoy national treatment in respect of the minimum registered capital
51
requirement. In addition, it eliminates the import tariffs to Mainland China on
a host of goods made in Hong Kong, allowing most Hong Kong companies to sell
high value-added products across the border. In terms of economic benefits, the
CEPA has good potential to open up many new business opportunities in Mainland
China for Hong Kong. Although it is difficult to quantify the potential benefit
we may realize from CEPA, through our Hong Kong-based AGI Logistics (HK) Ltd,
Shenzhen Careship Transportation Limited, as well as AGI China Ltd, we believe
we can enjoy "first mover" advantage, that is, we believe that our Hong
Kong-based subsidiaries can benefit from CEPA because we have experience in
doing business in, and we believe that we are knowledgeable in the PRC
regulations and business practices. We believe that our existing offices in Hong
Kong and Mainland China can also respond quicker than other U.S. freight
forwarders to ongoing developments in China.
Outsourcing of non-core activities
Companies are increasingly outsourcing freight forwarding, warehousing
and other supply chain activities so that they may focus on their respective
core competencies. Companies are increasingly turning to freight forwarders, and
logistics and supply chain management providers, to manage their purchase orders
and assure timely delivery of products at a lower cost and at greater efficiency
than if the function was undertaken directly.
Globalization of trade
As barriers to international trade are gradually reduced, international
trade will similarly increase. In addition, companies are increasingly sourcing
for supplies and raw materials from the most competitive suppliers throughout
the world. This form of sourcing would generally also lead to increased volumes
of trade.
Increased need for time-definite delivery
The demand for just-in-time and other time definite delivery has
increased as a result of the globalization of manufacturing, greater
implementation of demand-driven supply chains, the shortening of product cycles
and the increasing value of individual shipments.
A shift towards a decreasing number of global supply chain management
provides companies are decreasing the number of freight forwarders and supply
chain management providers with which they interact so that they might work with
a limited number of providers who are familiar with their requirements,
processes and procedures, and who can function as long-term partners. As such,
freight forwarders that are globally integrated and are able to provide a full
complement of services, including pick-up and delivery, shipment via air, sea
and land, warehousing and distribution and customs brokerage, are well
positioned to gain from this shift.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk in the ordinary course of its
business. These risks are primarily related to foreign exchange risk and changes
in short-term interest rates. The potential impact of the Company's exposure to
these risks is presented below:
Foreign Exchange Risk
The Company conducts business in many different countries and
currencies. The Company's business often results in revenue billings issued in a
country and currency, which differs from that where the expenses related to the
service are incurred. This brings a market risk to the Company's earnings.
52
Foreign exchange rates sensitivity analysis can be quantified by
estimating the impact on the Company's earnings as a result of hypothetical
change in the value of the U.S. Dollar, the Company's functional currency,
relative to the other currencies in which the Company transacts business. As one
of the major subsidiaries uses the Hong Kong Dollar (HKD), which has been linked
to the U.S. Dollar at a rate of HKD 7.8 to USD 1, as its functional currency,
there has been no material change in the Company's foreign exchange risk
exposure. However, if HKD was unlinked to the US Dollar, an average 10%
weakening of the U.S. Dollar, throughout the year ended December 31, 2004, would
have had the effect of raising operating income approximately $190,000. An
average 10% strengthening of the U.S. Dollar, for the same period, would have
had the effect of reducing operating income by approximately $156,000.
The Company currently does not utilize any the derivate financial
instruments or hedging transactions to manage foreign currency risk.
Interest Rate Risk
The Company does not currently utilize derivative financial instruments
to hedge against changes in interest rates. At December 31, 2004, the Company
had cash and cash equivalents and restricted cash of $6,600,000 and short-term
borrowings of $6,700,000, all subject to variable short-term interest rates. A
hypothetical change in the interest rate of 10% would have an insignificant
impact on the Company's earnings.
In management's view, there has been no material change in Company's
market risk exposure between 2003 and 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are contained in this Report: -
- - Report of Independent Certified Public Accountants;
- - Consolidated Balance Sheets - December 31, 2004 and 2003;
- - Consolidated Statements of Income - Years ended December 31, 2004, 2003 and
2002;
- - Consolidated Statements of Stockholders' Equity - Years ended December 31,
2004, 2003 and 2002;
- - Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003
and 2002; and
- - Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
53
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange
Act), as of the end of the period covered by this annual report.
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and procedures
will prevent all errors and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
the control system's objectives will be met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues, errors, and instances of
fraud, if any, have been or will be detected. The inherent limitations include,
among other things, the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Controls and procedures also can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management or employee
override of the controls and procedures. The design of any system of controls
and procedures is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls and procedures may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or procedures.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. If and when
management learns that any control or procedure is not being properly
implemented, (a) it immediately reviews our controls and procedures to determine
whether they are appropriate to accomplish the control objective and, if
necessary, modifies and improves our controls and procedures to assure
compliance with our control objectives, (b) it takes immediate action to cause
our controls and procedures to be strictly adhered to, (c) it immediately
informs all relevant managers of the requirement to adhere to such controls, as
well as all relevant personnel throughout our organization, and (d) it
implements in our training program specific emphasis on such controls and
procedures to assure compliance with such controls and procedures. The
development, modification, improvement, implementation and evaluation of our
systems of controls and procedures is a continuous project that requires changes
and modifications to them to remedy deficiencies, to improve training, and to
improve implementation in order to assure the achievement of our overall control
objectives.
Based upon the evaluation of our disclosure controls and procedures,
our Chief Executive Officer and Chief Financial Officer have concluded that,
subject to the limitations noted above, our disclosure controls and procedures
were effective to ensure that material information relating to us and our
consolidated subsidiaries is made known to them by others within those entities
to allow timely decisions regarding required disclosures.
There have been no significant changes in our internal controls, or in
other factors that could significantly affect internal controls, subsequent to
the date the Chief Executive Officer and the Chief Financial Officer completed
their evaluation, including any significant corrective actions with regard to
significant deficiencies and material weaknesses.
ITEM 9B. OTHER INFORMATION
Not applicable.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Set forth below are the names, ages, and positions of each of our
executive officers and directors, together with such person's business
experience during the past five (5) years. Their business experience is based on
information provided by each of them to us. Directors are to be elected annually
at our annual meeting of Stockholders and served in that capacity until the
earlier of their resignation, removal or the election and qualification of their
successor. Executive officers are elected annually by our Board of Directors to
hold office until the earlier of their death, resignation, or removal.
NAME AGE POSITIONS HELD AND TENURE
- ---- --- -------------------------
Alfred Lam 52 Chairman, Chief Executive Officer, Treasurer and
Director since August 2000
Scott Turner 50 President and Director since August 2000
Louisa Chan 44 Director since August 2000
John M. Dauernheim 60 Chief Operating Officer since January 2004
Bill Stangland 64 Chief Financial Officer since June 2004
Kaze Chan 38 Executive Vice President since August 2000
and Director since September 2002
Rango Lam 33 Secretary since August 2000
Kim E. Petersen 48 Director since October 2003
Liu Kwong Sang 43 Director since October 2003
Kenneth Chik 42 Director since January 2005
BIOGRAPHICAL INFORMATION
MR. ALFRED LAM serves as Chairman of the Board of Directors, CEO and Treasurer.
He has been a Director since December 2000. He has served in similar capacities
with our predecessors for more than the past five years. He has over 23 years of
experience in the freight forwarding industry during which period he established
relationships with airlines, shipping lines, customers and overseas agents.
MR. SCOTT TURNER has been our President and a Director since December 2000. He
is a co-founder of our subsidiary, Airgate International Corporation, and has
served as its President for more than 9 years.
MS. LUISA CHAN has been a director of the Company since December 2000. She has a
Diploma of Accounting. She is the spouse of Alfred Lam.
MR. JOHN M. DAUERNHEIM has served as our Chief Operating Officer since January
15, 2004. Mr. Dauernheim was Chief Operating Officer for OIA Global Logistics
("OIA"), a worldwide logistics and supply chain management company from June
2000 to December 2003. Prior to his association with OIA, he had been Vice
55
President of Worldwide Operations and Sales for Federal Express Corporation from
January 1984 to December 1993 and President and Chief Executive Officer of Aero
United Transportation Services, a regional logistics services company, from
December 1993 to June 1995. He has also held senior management positions for
Yellow Corporation, a nationwide trucking company and GES Exposition Services, a
trade show services company. Mr. Dauernheim has been on the Board of Directors
of the International Express Carriers Association, the Air Courier Conference
and the Bishop's Museum in Hawaii. Mr. Dauernheim holds a Bachelor of Business
Administration Degree from Manhattan College.
MR. BILL STANGLAND has served as our Chief Financial Officer since June 15,
2004. Prior to joining Pacific CMA, Inc., Mr. Stangland was the Controller for
Air-Sea Forwarders, Inc. from 1999 to 2004. Mr. Stangland started his career
with Flying Tiger. He has also held senior management positions in both the
United States and Europe. Mr. Stangland is a CPA and holds a Bachelor of Science
Degree from Florida State University.
MR. KAZE CHAN has served as our Executive Vice President since December 31, 2000
and as a Director since September 2002. He is also the Executive Vice President
and the General Manager and co-founder of AGI Logistics (HK) Ltd. He is
responsible for all freight activities in Hong Kong, China, Europe, and North
America. From 1993 to 1996, he worked as an Account Manager for Northwest
Airlines Inc. Mr. Chan holds a Master of Arts in Urban Studies from Michigan
State University.
MS. RANGO LAM has served as our Secretary since August 2000 and is responsible
for overseeing our corporate secretarial work. Ms. Lam also possesses over 9
years of experience in sales and marketing activities within the freight
forwarding industry. Prior to joining the Company, she worked for a publicly
listed freight forwarding company in Hong Kong, Benair (HK) Ltd. and World
Connect Limited from 1994 to 1996.
MR. KIM E. PETERSEN was appointed to the Board of Directors in October 2003. Mr.
Petersen is the Chairman of Mobius Security Group, a diversified homeland
security solutions provider that includes such companies as SeaSecure LLC,
RailSecure LLC, Infrastructure Intelligence Group LLC and Oceanix LLC. Mr.
Petersen has over 25 years of experience in maritime security and anti-terrorism
activities. He is a Trustee of the Maritime Security Institute and the Executive
Director of the Maritime Security Council, an international body that represents
the interests of ocean carriers and seaports.
MR. LIU KWONG SANG was appointed to the Board of Directors in October 2003, and
is a member of the audit committee. Mr. Liu is a Certified Public Accountant in
Hong Kong and Mr. Liu acts as the independent non-executive director of several
public companies listed on the Hong Kong Stock Exchange.
MR. KENNETH CHIK was appointed to the Board of Directors on January 1, 2005 and
is a member of the audit committee. Mr. Chik is a Barrister at Law in Hong Kong
and, since September 1988, has been in private practice in Hong Kong. Mr. Chik
has a broad-based litigation practice including real property, trust contract,
company and general commercial disputes.
There are no arrangements between any director or director nominee of the
Company and any other person pursuant to which he was, or will be, selected as a
director.
Board of Director and Committee Meetings
During the fiscal year ended December 31, 2004 (the "2004 fiscal
year"), the Board of Directors held a total of four (4) meetings and took action
by unanimous written consent nine (nine) times.
56
In addition, certain directors attended meetings of the Company's sole, standing
committee, the Audit Committee. All incumbent directors attended at least 77% of
the total number of meetings of the Board of Directors and the respective
committees on which they serve.
The Board of Directors maintains one standing committee, an Audit
Committee. Members of the Audit Committee are to be elected annually at the
Board of Directors' meeting following the Annual Meeting of Stockholders. The
Board of Directors does not have a nominating committee nor does any other
committee perform similar functions, and all such activities typically
associated with such a nominating committee are carried out by the full Board of
Directors.
The Audit Committee held four (4) meetings during the 2004 fiscal year;
Mr. Liu Kwong Sang and Mr. Tan Kay Hock were in attendance at the meetings. The
Audit Committee is responsible for overseeing the Company's reporting process
and the independent audit of the consolidated financial statements and its
duties include: (i) recommending to the Board of Directors the engagement or
discharge of our independent public accountants, (ii) meeting with our
independent public accountants to review the plans and results of the audit
engagement and to review all reports of the independent auditors, and to respond
to such reports, (iii) approving the services to be performed by our independent
public accountants and giving consideration to the range of the audit and
non-audit fees, and (iv) reviewing the scope and results of our internal and
external audit procedures.
Financial Expert.
The Board of Directors has designated Liu Kwong Sang as a "financial
expert" as such term is defined in 401(h) of Regulation S-K promulgated under
the Securities Act of 1933, as amended.
Independent Directors
Our Board of Directors believes that Liu Kwong Sang, Kenneth Chik and
Kim E. Petersen are "independent directors" as defined by the rules of the AMEX
and the SEC. Prior to January 1, 2005, Tan Kay Hock was a member of our audit
committee and also met the foregoing requirements of being an "independent
director."
Audit Committee
The Audit Committee oversees our financial reporting process and the
independent audit of the annual consolidated financial statements. The Audit
Committee is governed by a formal written Audit Committee Charter which was
included as Appendix A to our proxy statement dated October 13, 2003. The Board
of Directors, in its business judgment, has determined that the membership of
the Audit Committee satisfies the independence requirements of the AMEX and the
Company's Audit Committee Charter, notwithstanding the fact that said
requirements may not be applicable to us until July 31, 2005. The Audit
Committee will review and reassess the adequacy of the Audit Committee Charter
at least annually. The Audit Committee consists of two (2) independent members.
Liu Kwong Sang is professionally engaged in the practice of accounting and
auditing.
The Company, acting through its management and Board of Directors, has
the primary responsibility for the financial statements and reporting process,
including the systems of internal accounting controls. Management is responsible
for the preparation, presentation, and integrity of our financial statements,
the financial reporting process, and internal controls. BKD, LLP, independent
auditors engaged by the Company, is responsible for auditing our annual
financial statements and expressing their opinion thereon in accordance with the
standards of Public Companies Accounting Oversight Board (United States).
57
The Board of Directors approved the inclusion of the audited
consolidated financial statements in the our Annual Report filed with the
Commission. The Board of Directors has approved the appointment of BKD, LLP to
audit the Company's financial statements for our fiscal year to end December 31,
2005.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended, requires
our officers (as defined under Section 16), directors and persons who
beneficially own greater than 10% of a registered class of our equity securities
to file reports of ownership and changes in ownership with the Commission. Based
solely on a review of the forms filed with the SEC and that we have received, we
believe that, during the year ended December 31, 2004 all Section 16 filing
requirements applicable to our officers, directors and greater than 10%
beneficial owners were complied with by such persons except for the following:
The Form 3 of Mr. Dauernheim, which was due on February 10, 2004, was
not filed until August 29, 2004.
The Form 3 of Mr. Stangland, which was due on July 10, 2004, has not
yet been filed.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated
by reference to the information contained in the Registrant's Proxy Statement
under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 15, 2005, we had a total of 26,342,713 shares of common
stock issued and outstanding.
The following table sets forth information, as of March 15, 2005, with respect
to the beneficial ownership of our common stock by: (i) all directors; (ii) the
Named Executive Officers; (iii) all current executive officers and directors as
a group; and (iv) each stockholder known by us to be the beneficial owner of
more than 5% of our common stock.
(Executive Officers and Directors)
Approximate Percent of Class
Name Number of Shares Owned Beneficially Owned
- -------------------------------------------------------------------------------------------------------------------------
Alfred Lam (1) (2) (3) 17,761,448 68%
Louisa Chan (1) (2) (3) 17,761,448 68%
John N. Dauernheim 1,000 *
Bill Stangland 0 *
Scott Turner (1) 850,000 3%
Kaze Chan (1) 55,500 *
Each of Kenneth Chik, Kim E.
Petersen and Liu Kwong Sang (1) 0 *
All Executive Officers and Directors, as a 18,707,948 71%
Group (10 persons)
58
* Denotes less than 1%
- ------------------------
(1) The address for Alfred Lam, Louisa Chan, John N. Dauernheim, Bill
Stangland and Kaze Chan, is c/o Pacific CMA, Inc., Unit D 11/F, Garment
Center, 576-586 Castle Peak Road, Cheung Sha Wan, Kowloon, Hong Kong.
The address for Scott Turner is c/o Airgate International Corp., 153
-04 Rockaway Blvd., Jamaica, N.Y. 11434. The address for Kenneth Chik
is Suite 106, 1/F Crocodile House 1, 50 Connaught Road, Central Hong
Kong. The address for Kim E. Petersen is 3471 N. Federal Highway, Suite
611, Fort Lauderdale, Florida 33306. The address for Liu Kwong Sang is
Unit 1003, 10/F Rightful Center, 12 Tak Hing Street, Tsim Sha Tsui,
Kowloon, Hong Kong.
(2) Includes 8,000,000 shares owned by Buller Services Corp. Alfred Lam is
the beneficial owner of the shares held by Buller Services Corp.
(3) Alfred Lam and Louisa Chan are husband and wife.
Other Stockholders
If all shares of our common stock issuable upon conversion of shares of
our A Preferred Stock and issuable upon the exercise of warrants held by
Crestview Capital Master LLC ("Crestview") were converted and exercised,
respectively, Crestview would own approximately 8% of our common stock. However,
the contract restrictions contained in the relevant purchase agreements prohibit
Crestview from owning in excess of 4.9% of our common stock. Crestview has
advised the Company that it is beneficially owned by Richard Levy and Stewart
Flint. The address for Crestview is 95 Revere Drive, Suite A, Northbrook,
Illinois 60062.
If all shares of our common stock issuable upon conversion of shares of
our A Preferred Stock and issuable upon the exercise of warrants held by
Midsummer Investment, Ltd. ("Midsummer Ltd.") were converted and exercised,
respectively, Midsummer would own approximately 12% of our Common Stock.
However, the contract restrictions contained in the relevant purchase agreements
prohibit Midsummer Ltd. From owning in excess of 4.9% of our common stock.
Midsummer Ltd. has advised us that Midsummer Capital, LLC is the investment
manager to Midsummer Ltd. By virtue of such relationship, Midsummer Capital LLC
may be deemed to have dispositive power over the shares owned by Midsummer Ltd.
Midsummer Capital, LLC disclaims beneficial ownership of such shares. Mr.
Michael Amsalem and Mr. Scott Kaufman have delegated authority from the members
of Midsummer Capital, LLC with respect to our shares owned by Midsummer Ltd.
Messrs. Amsalem and Kaufman may be deemed to share dispositive power over our
shares owned by Midsummer Ltd. Messrs. Amsalem and Kaufman disclaim beneficial
ownership of such shares and neither person had any legal right to maintain such
delegated authority. The address for Midsummer Ltd. is 485 Madison Avenue, New
York, New York 10022.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 30, 2002, we completed the acquisition of 81% of the issued
and outstanding capital stock of Airgate International Corp. ("Airgate"). Scott
Turner, our President and a member of our Board of Directors was a principal
59
shareholder and was and continues to be an officer and director of Airgate. The
consideration payable to Mr. Turner, pursuant to the agreement whereby we
acquired Airgate, was $1,430,000 comprised of $750,000 in cash ($150,000 paid at
closing of the acquisition) with $600,000 payable in four (4) equal quarterly
installments on September 30, 2002 and February 28, July 31 and December 31,
2003, having been partially offset by a loan of $62,116 due from Airgate to Mr.
Turner. The balance of the purchase price of Airgate was paid by the issuance of
850,000 shares of our common stock with an estimated fair market value of $0.80
per share.
Alfred Lam, the Chairman of our Board of Directors, Chief Executive
Officer and our majority stockholder was until December 16, 2002, a shareholder
of AGI Logistics (Shenzhen) Limited ("Shenzhen Ltd."). Shenzhen Ltd. had been
one of our subsidiaries, until it was sold in May of 2001 to an entity
controlled by Alfred Lam and his spouse, Louisa Chan, also a Director. During
the year ended December 31, 2002, we paid freight costs of $125,873 to Shenzhen
Ltd. During that same year, we received a nominal amount of freight income from
Shenzhen Ltd.
Alfred Lam and Louisa Chan were also directors of Sparkle Shipping
(China) Limited ("Sparkle"). During 2001, we planned to engage in business
development in Northern China jointly with Sparkle. However, subsequently, we
decided to abandon this project due to regional economic uncertainties. An
initial deposit paid to Sparkle of $115,385 was treated as advance to a related
party and bore interest at the rate of six (6%) percent per annum. The advance
was fully repaid during the last quarter of 2002.
As of December 31, 2002, 2003 and 2004, Alfred Lam and Louisa Chan had
personally guaranteed $5,328,683, $6,008,594 and $9,810,167, respectively, in
general banking and loan facilities granted by various banks to the Company and
its subsidiaries.
As of December 31, 2002 and 2003, the balances due to Alfred Lam in the
amounts of $23,783 and $20,493, respectively, were unsecured, did not bear
interest and had no fixed terms.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our principal outside accountant is BKD, LLP. Set forth below are the
fees and expenses for BKD, LLP for each of the last two years for the following
services provided to us:
2004 2003
---- ----
Audit Fees $108,644 $ 0
Audit-Related Fees (1) 40,036 0
Tax Fees (2) 39,464 34,129
Total Fees 188,144 34,129
- --------------------------
(1) Audit-related service fees include fees for issuance of consents and
comfort letters, audit and accounting assistance with respect to our A
Preferred Stock private placement and acquisitions during the year.
(2) Tax return preparation, quarterly estimates, tax planning and
tax-related research.
60
The Audit Committee of our Board of Directors approves each non-audit
engagement or service with or by our independent auditor. Prior to approving any
such non-audit engagement or service, it is the Committee's practice to first
receive information regarding the engagement or service that (i) is detailed as
to the specific engagement or service, and (ii) enables the Committee to make a
well-reasoned assessment of the impact of the engagement or service on the
auditor's independence. The Audit Committee approved all non-audit engagements
with, and services provided by, our auditors during 2004.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
Exhibit Number and Document Description
3.1 Articles of Incorporation of Pacific CMA, Inc. (Delaware)
(incorporated by reference, filed with the Registrant's Form 8 A/A
on March 24, 2004).
3.2 By-laws of Pacific CMA, Inc. (Delaware) (incorporated by
reference, filed with Registrant's Form 8 A/A on March 24, 2004).
3.3 Agreement and Plan of Merger by and between Pacific CMA, Inc., a
Colorado corporation and Pacific CMA, Inc., a Delaware corporation
(incorporated by reference, filed with Registrant's Form 8 A/A on
March 24, 2004).
3.3A Certificate of Designation of Preferences, Right and Limitations
of Series A Convertible Preferred Stock as of Pacific CMA, Inc.
(Delaware) (incorporated by reference, filed with Registrant's
Form 8-K on April 15, 2004).
3.3B. Certificate of Amendment to Certificate of Designations
(incorporated by reference, filed with Registrant's Form 8-K on
May 10, 2004).
3.4 Certificate of Merger as filed with the State of Delaware
(incorporating by reference, filed with Registrant's Form 8-K on
April 8, 2004).
3.5 Articles of Merger and Plan of Merger and Reorganization as filed
with the State of Colorado (incorporated by reference, filed with
Registrant's Form 8-K on April 8, 2004).
4.1 Specimen Common Stock Certificate (incorporated by reference,
filed with Registrant's Form 10-SB on October 14, 1999).
10.1 Stock Purchase Agreement dated April 30, 2002, by and among
Pacific CMA International, LLC, Pacific CMA, Inc., Airgate
International Corp, Thomas Zambuto and Scott Turner (incorporated
by reference, filed on or about May 14, 2002 with Registrant's
Form 8-K).
10.2 Promissory Note dated April 30, 2002, in favor of Scott Turner
(incorporated by reference, filed on or about May 14, 2002 with
Registrant's Form 8-K).
61
10.3 Promissory Note dated April 30, 2002, in favor of Thomas Zambuto
(incorporated by reference, filed on or about May 14, 2002 with
Registrant's Form 8-K).
10.4 Pledge Agreement dated April 30, 2002, between Scott Turner as
Pledgee, Pacific CMA International, LLC, as Pledgor, and Robinson
Brog Leinwand Greene Genovese & Gluck, P.C. as Pledgeholder
(incorporated by reference, filed on or about May 14, 2002 with
Registrant's Form 8-K).
10.5 Pledge Agreement dated April 30, 2002, between Thomas Zambuto as
Pledgee, Pacific CMA International, LLC, as Pledgor, and Robinson
Brog Leinwand Greene Genovese & Gluck, P.C. as Pledgeholder
(incorporated by reference, filed on or about May 14, 2002 with
Registrant's Form 8-K).
10.6 Guaranty by Pacific CMA, Inc., in favor of Scott Turner, dated
April 30, 2002 (incorporated by reference, filed on or about May
14, 2002 with Registrant's Form 8-K).
10.7 Guaranty by Pacific CMA, Inc., in favor of Thomas Zambuto, dated
April 30, 2002 (incorporated by reference, filed with Registrant's
Form 8-K on or about May 14, 2003).
10.8 Escrow Agreement dated April 30, 2002, between Thomas Zambuto and
Scott Turner as Seller, Pacific CMA International, LLC, as
Purchaser, and Robinson Brog Leinwand Greene Genovese & Gluck,
P.C., as Escrow Agent (incorporated by reference, filed with
Registrant's Form 8-K on or about May 14, 2004).
10.9 Employment Agreement of Scott Turner, dated April 30, 2002
(incorporated by reference, filed with Registrant's Form 8-K on or
about May 14, 2004).
10.10 2000 Stock Plan (incorporated by reference, filed with
Registrant's Form S-8 on or about December 5, 2000).
10.11 Form of Stock Grant Agreement (incorporated by reference, filed
with Registrant's Form S-8 on December 5, 2000).
10.12A Mutual Release and Termination Agreement dated December 19, 2003
(but not fully executed until January 9, 2004) among Duncan
Capital LLC, Strategic Growth International, Inc. and Pacific CMA,
Inc. (incorporated by reference, filed with Registrant's
Post-Effective Amendment No. 1 to Form S-3, File No. 333-111163,
on January 28, 2004).
10.12B Amendment dated January 16, 2004 to the Mutual Release and
Termination Agreement dated December 19, 2003 (incorporated by
reference, filed with Registrant's Post-Effective Amendment No. 1
to Form S-3, File No. 333-111163 on January 28, 2004).
10.13A & B Forms of warrants to purchase common stock issued by Pacific CMA,
Inc. to the purchasers in a November 2003 private placement
offering (incorporated by reference, filed with Registrant's Form
S-3, File No. 333-111163, on December 15, 2003).
10.14 Warrants to purchase common stock issued by Pacific CMA, Inc. to
Rockwood, Inc. as compensation for services rendered in connection
with the November 2003 private placement offering (incorporated by
reference, filed with Registrant's Form S-3, File No. 333-111163,
on December 15, 2003).
62
10.15 Form of Securities Purchase Agreement by and between Pacific CMA,
Inc. and each of the purchasers in the November 2003 private
placement offering (incorporated by reference, filed with
Registrant's Form S-3, File No. 333-111163 on December 15, 2003).
10.16 Form of Registration Rights Agreement by and between Pacific CMA,
Inc. and each of the purchasers in the November 2003 private
placement offering (incorporated by reference, filed with
Registrant's Form S-3, File No. 333-111163, on December 15, 2002).
10.17A & B Warrants issued to Duncan Capital, LLC by Pacific CMA, Inc., dated
as of November 18, 2003 (incorporated by reference, filed with
Registrant's Form S-3, File No. 333-111163, on December 15, 2003).
10.18 Warrants issued to Strategic Growth International by Pacific CMA,
Inc., dated as of November 18, 2003 (incorporated by reference,
filed with Registrant's Form S-3, File No. 333-111163, on December
15, 2003).
10.19 Compensation Agreement between Registrant and Henrik Christensen
(incorporated by reference, filed with Registrant's Form S-8 on
March 29, 2004).
10.20 Securities Purchase Agreement, dated as of April 8, 2004, among
Crestview Capital Master LLC. ("Crestview"), Midsummer Investment
Ltd. ("Midsummer") and Registrant (incorporated by reference,
filed with Registrant's Form 8-K on April 15, 2004).
10.21 Registration Rights Agreement, dated as of April 8, 2004, among
Crestview, Midsummer and Registrant (incorporated by reference,
filed with Registrant's Form 8-K on April 25, 2004).
10.22 Form of Warrant issued to Crestview and Midsummer (incorporated by
reference, filed with Registrant's Form 8-K on April 15, 2004).
10.23 Form of Warrant issued to Midsummer in May 2004 (incorporated by
reference, filed with Registrant's Form 8-K on May 10, 2004).
10.24 Securities Purchase Agreement, dated as of May 6, 2004, between
Midsummer and Registrant (incorporated by reference, filed with
Registrant's Form 8-K May 10, 2004).
10.25 Registration Rights Agreement, dated as of May 6, 2004, between
Midsummer and Registrant (incorporated by reference, filed with
Registrant's Form 8-K on May 10, 2004).
63
14.1 Registrant's Code of Ethics for Chief Financial Officer
(incorporated by reference, filed with Registrant's Annual Report
on Form 10-KSB on March 29, 2004).
21.1 Subsidiaries of the Registrant (1).
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-4(a))(1)
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a))(1)
32.1 Certificate of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(b))(1)
32.2 Certificate of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(b))(1)
- --------------------
(1) Exhibit filed herewith.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PACIFIC CMA, INC.
By: /s/ Alfred Lam
--------------------------------------------
Alfred Lam
Chairman of the Board and
Chief Executive Officer
March 30, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 30, 2005 /s/ Alfred Lam
-------------------------------------------------
Alfred Lam
Chief Executive Officer and Director (principal
executive officer)
March 30, 2005 /s/ Bill Stangland
-------------------------------------------------
Bill Stangland
Chief Financial Officer
(principal financial and accounting officer)
March 30, 2005 /s/ Scott Turner
-------------------------------------------------
Scott Turner
President and Director
March 30, 2005 /s/ Louisa Chan
-------------------------------------------------
Louisa Chan, Director
March 30, 2005 /s/ Kaze Chan
-------------------------------------------------
Kaze Chan, Director
March 30, 2005 /s/ Kim E. Peterson
-------------------------------------------------
Kim E. Peterson, Director
March 30, 2005 /s/ Liu Kwong Sang
-------------------------------------------------
Liu Kwong Sang, Director
-------------------------------------------------
Kenneth Chik, Director
65
Pacific CMA, Inc.
Accountants' Report and Consolidated Financial Statements
December 31, 2004 and 2003
Pacific CMA, Inc.
December 31, 2004 and 2003
Contents
Independent Accountants' Report...........................................1
Consolidated Financial Statements
Balance Sheets........................................................2
Statements of Income..................................................3
Statements of Stockholders' Equity....................................4
Statements of Cash Flows..............................................5
Notes to Financial Statements.........................................7
[logo] Moores Rowland
Report of Prior Independent Auditors 34th Floor. The Lee Gardens
33 Hysan Avenue
Causeway Bay. Hong Kong
To the Board of Directors and Stockholder of Telephone (852) 2909 5555
Pacific CMA, Inc. Facsimile (852) 2810 0032
E-mail: office@mooresrowland com hk
Web Site: www mooresrowland com hk
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of Pacific CMA, Inc. and its subsidiaries ("the Group") for the
year ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of the Group's operations and cash
flows for the year ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Moores Rowland
- --------------------------------
Moores Rowland
Chartered Accountants
Certified Public Accountants
Hong Kong
Date: May 26, 2003
Chartered Accountants A member of
Certified Public Accountants Moores Rowland International (852) 2909 5555 (852) 2810 0032
an association of independent office@mooresrowland com hk
accounting firms throughout www mooresrowland com hk
the world
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Pacific CMA, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Pacific CMA,
Inc. as of December 31, 2004 and 2003, and the related consolidated statements
of income, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific CMA, Inc. as
of December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ BKD, LLP
- ---------------------------------
Indianapolis, Indiana
March 11, 2005
Pacific CMA, Inc.
Consolidated Balance Sheets
December 31, 2004 and 2003
Assets
2004 2003
------------ ------------
Current Assets
Cash and cash equivalents $ 1,538,146 $ 912,240
Restricted cash 5,088,088 5,786,064
Accounts and notes receivable, net of allowance; 2004 - $295,144;
2003 - $156,617 13,480,831 7,360,859
Refundable income taxes -- 147,092
Other receivables, deposits and prepaid expenses 3,324,207 2,102,599
Current portion of loan receivable 17,600 12,600
Deferred income taxes 57,476 40,283
------------ ------------
Total current assets 23,506,348 16,361,737
------------ ------------
Property and Equipment, net 619,753 241,186
------------ ------------
Other Assets
Goodwill 2,740,508 2,683,768
Intangible assets, net 1,357,814 1,906,667
Deferred tax asset 952,319 152,774
Deferred financing costs on Series A preferred stock 786,693 --
Investment deposit 1,037,001 900,900
Equity investment in affiliates 258,912 --
Other 30,994 140,248
------------ ------------
7,164,241 5,784,357
------------ ------------
$ 31,290,342 $ 22,387,280
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable - bank $ 6,679,406 $ 6,008,594
Current maturities of capital lease obligations 62,537 26,851
Accounts payable 9,357,362 7,319,281
Payable to directors -- 20,493
Payable-minority shareholder 79,409 --
Accrued expenses 908,930 598,359
Short-term loans payable -- 537,510
Income taxes payable 157,741 --
------------ ------------
Total current liabilities 17,245,385 14,511,088
------------ ------------
Capital Lease Obligations 64,373 21,592
------------ ------------
Series A Preferred Stock, net 4,228,599 --
------------ ------------
Minority Interest 92,248 --
------------ ------------
Stockholders' Equity
Common stock, no par value; authorized - 100,000,000 shares and
issued - 25,124,347 and 25,675,590 shares 5,113,412 6,195,492
Warrants outstanding 1,073,653 --
Additional paid-in capital 1,953,384 1,786,718
Retained earnings 2,760,947 2,433,420
Accumulated other comprehensive income 24,174 11,440
Unearned compensation cost (1,265,833) (2,572,470)
------------ ------------
Total stockholders' equity 9,659,737 7,854,600
------------ ------------
$ 31,290,342 $ 22,387,280
============ ============
See Notes to Consolidated Financial Statements 2
Pacific CMA, Inc.
Consolidated Statements of Income
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
------------ ------------ ------------
Freight Forwarding Income $ 99,600,454 $ 73,093,164 $ 52,903,737
------------ ------------ ------------
Operating Expenses
Cost of forwarding 84,821,796 62,540,068 45,005,074
General and administrative 13,175,477 9,840,487 6,081,751
Depreciation and amortization 780,022 762,367 589,523
Stock-based compensation cost 286,247 111,143 70,075
------------ ------------ ------------
99,063,542 73,254,065 51,746,423
------------ ------------ ------------
Operating Income (Loss) 536,912 (160,901) 1,157,314
------------ ------------ ------------
Other Income (Expense)
Interest and other income 302,624 238,361 151,520
Interest expense (313,920) (228,178) (96,420)
Gain on disposal of subsidiary -- -- 11,390
Settlement of litigation -- -- (257,500)
Exchange listing costs -- (242,606) --
Withdrawn registration statement costs -- (171,120) --
Preferred stock dividend and amortization
of deferred financing costs (546,494) -- --
Amortization of preferred stock discount (168,312) -- --
Equity in income of affiliate 8,823 -- --
------------ ------------ ------------
(717,279) (403,543) (191,010)
------------ ------------ ------------
Income (Loss) Before Income Taxes (180,367) (564,444) 966,304
Provision for Income Taxes (Benefit) (488,697) (572,933) 263,454
------------ ------------ ------------
Income Before Minority Interest 308,330 8,489 702,850
Minority Interest 19,197 -- --
------------ ------------ ------------
Net Income $ 327,527 $ 8,489 $ 702,850
============ ============ ============
Basic Earnings Per Share $ 0.01 $ 0.00 $ 0.03
============ ============ ============
Diluted Earnings Per Share $ 0.01 $ 0.00 $ 0.03
============ ============ ============
See Notes to Consolidated Financial Statements 3
Pacific CMA, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2004, 2003 and 2002
Additional
Common Stock, Issued Warrants Paid-in Retained Comprehensive
Shares Amount Outstanding Capital Earnings Income
--------------------------------------------------------------------------------------------
Balance, January 1, 2002 20,149,050 $ 51,165 $ -- $ 1,786,718 $ 1,722,081
Net income 702,850 $ 702,850
-------------
Comprehensive income $ 702,850
=============
Issuance of common stock on
acquisition of subsidiary 1,700,000 1,360,000
Issuance of common stock 50,000 12,500
Stock grant 523,400 128,200
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2002 22,422,450 1,551,865 -- 1,786,718 2,424,931
Net income 8,489 $ 8,489
Foreign currency translation
adjustment 19,765
-------------
Comprehensive income $ 28,254
=============
Issuance of common stock 1,274,240 1,760,329
Stock grant 1,978,900 2,883,298
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 25,675,590 6,195,492 -- 1,786,718 2,433,420
Net income 327,527 $ 327,527
Foreign currency translation
adjustment 12,734
-------------
Comprehensive income $ 340,261
=============
Issuance of common stock on
acquisition of subsidiary 120,000 82,800
Issuance of common stock for
preferred stock dividend 223,757 152,500
Issuance of warrants 1,073,653
Beneficial conversion on preferred
stock 166,666
Stock grant and amortization of
unearned stock compensation 155,000 226,100
Cancellation of prior stock grants (1,050,000) (1,543,480)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 25,124,347 $ 5,113,412 $ 1,073,653 $ 1,953,384 $ 2,760,947
============= ============= ============= ============= =============
Accumulated
Other
Comprehensive Unearned
Income Compensation
(Loss) Cost Total
--------------------------------------------
Balance, January 1, 2002 $ (8,325) $ -- $ 3,551,639
Net income 702,850
Comprehensive income
Issuance of common stock on
acquisition of subsidiary 1,360,000
Issuance of common stock 12,500
Stock grant 128,200
------------- ------------- -------------
Balance, December 31, 2002 (8,325) -- 5,755,189
Net income 8,489
Foreign currency translation
adjustment 19,765 19,765
Comprehensive income
Issuance of common stock 1,760,329
Stock grant (2,572,470) 310,828
------------- ------------- -------------
Balance, December 31, 2003 11,440 (2,572,470) 7,854,600
Net income 327,527
Foreign currency translation
adjustment 12,734 12,734
Comprehensive income
Issuance of common stock on
acquisition of subsidiary 82,800
Issuance of common stock for
preferred stock dividend 152,500
Issuance of warrants 1,073,653
Beneficial conversion on preferred
stock 166,666
Stock grant and amortization of
unearned stock compensation 150,859 376,959
Cancellation of prior stock grants 1,155,778 (387,702)
------------- ------------- -------------
Balance, December 31, 2004 $ 24,174 $ (1,265,833) $ 9,659,737
============= ============= =============
See Notes to Consolidated Financial Statements 4
Pacific CMA, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
----------- ----------- -----------
Operating Activities
Net income $ 327,527 $ 8,489 $ 702,850
Items not requiring (providing) cash
Amortization of preferred stock discount 168,312 -- --
Preferred stock dividend and amortization of
deferred financing costs 513,993 -- --
Depreciation and amortization 204,461 190,367 208,190
Amortization of intangibles 575,561 572,000 381,333
(Gain) loss on sale of property and equipment (5,304) 9,870 6,773
Gain on sale of subsidiary -- -- (11,390)
Minority interest in loss of subsidiary (19,197) -- --
Common stock issued for services and employee
compensation 286,247 111,143 70,075
Undistributed earnings of affiliates (8,823) -- --
Provision for doubtful accounts 86,575 60,160 77,511
Deferred income taxes (830,076) (688,841) (74,204)
Changes in
Accounts receivable (5,835,480) (956,878) (1,369,229)
Accounts payable 1,852,411 920,103 1,283,370
Accrued expenses 288,986 89,043 114,449
Income taxes refundable/payable 304,833 (387,937) 265,298
Other assets and liabilities (1,432,314) (1,197,938) (437,816)
----------- ----------- -----------
Net cash provided by (used in) operating
activities (3,522,288) (1,270,419) 1,217,210
----------- ----------- -----------
Investing Activities
Collection of loans receivable 17,620 249,610 210,135
Acquisition of subsidiaries 45,246 -- (613,618)
Equity investment in affiliates (286,647) -- --
Purchase of property and equipment (428,085) (74,987) (154,877)
Proceeds from sale of subsidiary in 2002 -- 398,077 96,070
Proceeds from sale property and equipment 13,122 32,819 15,000
Deposit for potential equity investment (136,101) (900,900) --
Purchases of certificate of deposit -- -- (50,000)
----------- ----------- -----------
Net cash used in investing activities (774,845) (295,381) (497,290)
----------- ----------- -----------
Financing Activities
Net change in restricted cash 697,976 (3,130,475) (1,204,693)
Net change in notes payable - bank 670,812 3,808,893 742,914
Installments paid on acquisition of subsidiary in 2002 -- (900,000) --
Principal payments under capital lease obligation (52,978) (64,422) (31,785)
Proceeds from short-term debt 3,054 887,930 71,391
Payments on short-term debt (562,373) (380,027) (274,452)
Issuance of common stock, net of issuance costs (3,000) 1,736,649 --
Proceeds from issuance of Series A Preferred Stock
and detachable stock warrants 5,000,000 -- --
Deferred financing costs (824,801) -- --
Advances - director, net (20,493) 58,826 (423,712)
----------- ----------- -----------
Net cash provided by (used in) financing
activities 4,908,197 2,017,374 (1,120,337)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 611,064 451,574 (400,417)
Foreign Currency Exchange Difference 14,842 19,009 602
Cash and Cash Equivalents, Beginning of Year 912,240 441,657 841,472
----------- ----------- -----------
Cash and Cash Equivalents, End of Year $ 1,538,146 $ 912,240 $ 441,657
=========== =========== ===========
See Notes to Consolidated Financial Statements 5
Pacific CMA, Inc.
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
---------- ---------- ----------
Supplemental Cash Flows Information
Interest paid $ 346,420 $ 227,391 $ 14,856
Income taxes paid 75,862 507,845 210,091
Income taxes refunded 39,250 -- --
Capital lease obligation incurred for equipment 131,445 36,628 64,103
Sale of Sparkle subsidiary -- -- 398,077
Acquisition of Airgate subsidiary -- -- 2,260,000
See Notes to Consolidated Financial Statements 5
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
The Company is a global, non-asset based logistic and freight forwarder
providing supply chain logistics services. It coordinates the shipping and
the storage of raw materials, supplies, components and finished goods by
air, sea, river, rail and road. Its cargo includes garments on hangers,
refrigerated cargo, hazardous materials and perishable goods. The Company
has operating locations in Chicago, New York, Los Angeles, Miami,
Singapore, Hong Kong and the Peoples Republic of China. The Company had
approximately $17,700,000 of net assets in foreign countries.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, AGI Logistics (Hong Kong) Limited;
Shenzen Careship International Transportation Limited (formerly Guangdong
Springfield Logistics Services Limited); Pacific CMA International, LLC;
Paradigm International Inc. and AGI China Limited. Also included are its
majority owned subsidiaries, Airgate International Corp. (81%) and AGI
Freight Singapore Pte Ltd (60%). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash Equivalents
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 2004 and
2003, cash equivalents consisted primarily of money market accounts with
brokers and certificates of deposit. At December 31, 2004, the Company's
cash accounts in the United States of America exceeded federally insured
limits by approximately $260,000.
7
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Accounts and Notes Receivable
Accounts receivable are stated at the amount billed to customers. The
Company provides an allowance for doubtful accounts, which is based upon a
review of outstanding receivables, historical collection information and
existing economic conditions. Accounts receivable are ordinarily due 30
days after the issuance of the invoice. Accounts past due more than 120
days are considered delinquent. Delinquent receivables are written off
based on individual credit evaluation and specific circumstances of the
customer.
Notes receivable are stated at their outstanding principal amount, net of
an allowance for uncollectible notes. The Company provides an allowance
for uncollectible notes, which is based upon a review of outstanding
receivables, historical collection information and existing economic
conditions. Outstanding notes accrue interest based on the terms of the
respective note agreements. A note receivable is considered delinquent
when the debtor has missed three or more payments. At that time, the note
is placed on nonaccrual status and interest accrual ceases and does not
resume until the note is no longer classified as delinquent. Delinquent
notes are written off based on individual credit evaluation and specific
circumstances of the borrower.
Property and Equipment
Property and equipment are depreciated over the estimated useful life of
each asset. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful lives of the improvements. Annual
depreciation is primarily computed using the straight line method.
Goodwill
Goodwill is tested annually for impairment. If the implied fair value of
goodwill is lower than its carrying amount, a goodwill impairment is
indicated and goodwill is written down to its implied fair value.
Subsequent increases in goodwill value are not recognized in the financial
statements.
Intangibles
Intangible assets consist of non-contractual customer relationships
identified during the acquisitions of various subsidiaries. They are
recorded at cost allocated at acquisition and are amortized on a
straight-line basis over their estimated useful economic life, generally
five years. They are tested for impairment in accordance with FASB
Statement No. 142.
8
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Income Taxes
Provisions for income taxes have been provided in accordance with the tax
rates in the United States of America or tax laws in effect in Hong Kong
depending on income arising from their respective jurisdictions.
Deferred tax assets and liabilities are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax asset will not be
realized. The Company files consolidated income tax returns with its
domestic subsidiaries.
Revenue Recognition
The Company derives its revenues from two main sources: air freight and
ocean freight. As a non asset-based carrier, the Company does not own
transportation assets. It generates the major portion of its revenues by
purchasing freight services from asset-based shippers and reselling those
services to customers. By consolidating shipments from multiple customers
and by purchasing cargo space in bulk, the Company can negotiate more
favorable rates from the shippers than the customers could negotiate on
their own.
Revenues include the charges to the Company from the shipper carrying the
freight. For export freight, the Company receives a Master Airway Bill for
air shipments and a Master Ocean Bill of Lading for ocean shipments when
the freight is delivered to the shipper. With the exchange of this
contract, the risk of loss passes to the shipper. Revenue is recognized
when the shipper leaves the terminal. For import freight, revenues are
recognized as the freight arrives at its final destination. The direct
costs from the shipper are also recognized at these times.
International shipping can require various other services other than just
shipping such as break bulk, customs clearance, local deliveries and
distribution. Often the Company provides these services to its customers.
Revenues from these services are recognized when the service is complete.
Earnings Per Share
Earnings per share have been computed based upon the weighted-average
common shares outstanding during each year.
9
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Foreign Currency Translation
The consolidated financial statements include foreign subsidiaries. The
Company considers the US Dollar as its functional currency as a
substantial portion of the Company's business activities are based in US
Dollars. Transactions involving foreign currencies are translated at the
approximate rates of exchange existing at the transaction dates.
Translation differences are included in the statements of income and are
not material.
Assets and liabilities of subsidiaries whose functional currency is not
the US Dollar are translated into US Dollars at the rate in effect at the
balance sheet date. Revenues and expenses are translated at the average
exchange rate during the year. The effects of translation adjustments have
been recorded in accumulated other comprehensive income.
Reclassifications
Certain reclassifications have been made to the 2003 financial statements
to conform to the 2004 financial statement presentation. These
reclassifications had no effect on net earnings.
Note 2: Loans Receivable
As of December 31, 2004 and 2003, $48,594 and $66,214 is due from Thomas
Zambuto, President and former shareholder of Airgate International Corp.
The note is uncollateralized, interest free with annual repayments of
approximately $17,600.
Note 3: Property and Equipment, net
Property and equipment consists of the following:
2004 2003
----------- -----------
Office equipment $ 532,863 $ 491,459
Furniture and fixtures 548,484 300,664
Motor vehicles 273,715 207,828
----------- -----------
1,355,062 999,951
Less: Accumulated depreciation) (735,309) (758,765)
----------- -----------
$ 619,753 $ 241,186
=========== ===========
10
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 4: Investment Deposit
Investment deposits are cash deposits paid to potential acquisition
targets. As of December 31, 2004, there was $850,000 included in
investment deposits that represents the purchase price of a 46.92% equity
interest in Careship International Transportation Ltd. ("CITL"), a limited
liability company established in the Peoples Republic of China ("PRC").
CITL is engaged in providing air and sea freight services in the PRC. In
January 2005, the Company received final approval from the government in
the PRC and completed the transaction.
Also at December 31, 2004, the Company deposited $150,000 with a potential
acquisition target in the United States. The Company has signed a letter
of intent with the target. The estimated purchase price is $1,000,000 to
$1,500,000.
Note 5: Acquired Intangible Assets and Goodwill
The carrying basis and accumulated amortization of recognized intangible
assets at December 31, 2004 and 2003, were:
2004 2003
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------------------------------------------------------
Amortized intangible assets -
non-contractual customer list $2,886,708 $1,528,894 $2,860,000 $ 953,333
========== ========== ========== ==========
Amortization expense for the years ended December 31, 2004, 2003 and 2002
was $575,561, $572,000 and $381,333, respectively. Estimated amortization
expense for each of the following five years is:
2005 $577,342
2006 577,342
2007 196,009
2008 5,342
2009 1,779
The changes in the carrying amount of goodwill for the years ended
December 31, 2004 and 2003 were:
2004 2003
-------------------------
Balance as of January 1 $2,683,768 $2,683,768
Goodwill acquired during the year 56,740 --
---------- ----------
Balance as of December 31 $2,740,508 $2,683,768
========== ==========
11
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 6: Notes Payable - Bank
The Company has a $2,500,000 line of credit that accrues interest at the
bank's prime rate plus 0.75% (6.25% at December 31, 2004) and matures in
September 2005. The line is collateralized by a $1,000,000 certificate of
deposit held by the Bank, substantially all of the assets of Airgate and a
personal guarantee of a director of the Company. This certificate of
deposit is recorded as restricted cash. The note requires the Company meet
certain debt-to-equity ratios and other financial covenants. As of
December 31, 2004 and 2003, there was $2,500,000 borrowed against this
facility.
The Company has certain other banking facilities to finance its working
capital. The facilities available totaled approximately $7,210,000. The
facilities accrue interest at rates varying with the prime rate in Hong
Kong, Hong Kong Interbank Offered Rate (HIBOR), or the cost of funds rate.
As of December 31, 2004, these rates ranged between 1.01% - 6.50%. The
facilities require annual renewals and are collateralized by personal
guarantees of two directors and restricted cash of approximately
$3,800,000. As of December 31, 2004 and 2003, amounts outstanding against
these facilities were $4,179,406 and $3,508,594, respectively.
Note 7: Short-Term Notes Payable
All short-term borrowings as of December 31, 2003 were repaid in 2004.
Short-term borrowings consisted of the following:
2004 2003
-------- --------
Bank loans payable, Bank's prime rate plus 1.0% (6.0%
at December 31, 2003), final payment due January 2004,
guaranteed by a director of the Company $ -- $172,453
Bank loan payable, Bank's prime rate (5.0% at December 31,
2003), final payment due November 2004, guaranteed by a
director of the Company -- 283,614
Bank loan payable, Bank's prime rate plus 0.5% (5.5% at
December 31, 2003), final payment due July 2004, guaranteed
by two directors of the Company -- 81,443
-------- --------
$ -- $537,510
======== ========
12
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 8: Capital Lease Obligations
The Company has entered into various capital leases for automobiles and
postage equipment expiring at various dates through 2005.
Aggregate annual payments on capital lease obligations at December 31,
2004 are:
2004 2003
--------- ---------
2004 $ -- $ 29,522
2005 68,457 23,744
2006 44,886 --
2007 23,400 --
2008 2,320 --
--------- ---------
139,063 53,266
Less amount representing interest (12,153) (4,823)
--------- ---------
Present value of future minimum lease payments $ 126,910 $ 48,443
========= =========
Property and equipment include the following property under capital
leases:
2004 2003
--------- ---------
Equipment $ 207,502 $ 76,649
Less accumulated depreciation (81,839) (25,529)
--------- ---------
$ 125,663 $ 51,120
========= =========
Note 9: Operating Leases
The Company has noncancellable operating leases for operating locations
and office equipment that expire in various years through 2009. These
leases generally require the Company to pay all executory costs (property
taxes, maintenance and insurance).
Future minimum lease payments at December 31, 2004, were:
2005 $ 612,329
2006 511,265
2007 307,311
2008 185,268
2009 20,626
----------
$1,636,799
==========
Rental expense for all operating leases for the years ended December 31,
2004, 2003 and 2002 was $512,619, $445,927 and $333,592, respectively.
13
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 10: Income Taxes
Income before provision for income taxes was taxed under the following
jurisdictions for the years then ended:
2004 2003 2002
----------------------------------------------
United States $(1,819,684) $(1,140,624) $ (531,455)
Hong Kong 1,687,309 576,180 1,497,759
Singapore (47,992) -- --
----------- ----------- -----------
$ (180,367) $ (564,444) $ 966,304
=========== =========== ===========
The provision for income taxes includes these components:
2004 2003 2002
---------------------------------
Taxes currently payable
United States $ 56,570 $ (24,428) $ 73,898
Hong Kong 284,809 140,336 263,160
Singapore -- -- --
Deferred income taxes
United States (856,812) (652,374) (73,604)
Hong Kong 26,736 (36,467) --
Singapore -- -- --
--------- --------- ---------
Income tax (benefit) expense $(488,697) $(572,933) $ 263,454
========= ========= =========
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2004 2003 2002
----------------------------------
Computed at the statutory rate (34%) $ (61,325) $(191,911) $ 328,544
Increase (decrease) resulting from
Nondeductible expenses 34,881 28,314 132,938
Nontaxable income -- (26,310) (4,655)
Stock compensation cost (30,947) (83,361) --
Income tax credit carryforwards -- -- (67,560)
State income taxes (189,562) (125,122) 36,497
Effect of foreign tax rates (261,912) (92,032) (271,905)
Effective tax rate differential on
deferred income taxes 10,918 (82,681) 98,505
Other 9,250 170 11,090
--------- --------- ---------
Income tax (benefit) expense $(488,697) $(572,933) $ 263,454
========= ========= =========
14
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The tax effects of temporary differences related to deferred taxes shown
on the balance sheets were:
2004 2003
---------------------------
Deferred tax assets
Net operating loss carryforwards $ 1,313,044 $ 553,362
Stock-based compensation expense 62,514 9,281
Depreciation 10,677 30,048
Registration costs 136,658 81,470
Allowance for doubtful accounts 52,991 31,002
Other 8,824 --
----------- -----------
1,584,708 705,163
Deferred tax liabilities - amortization of intangibles (574,913) (512,106)
----------- -----------
Net deferred tax asset (liability) $ 1,009,795 $ 193,057
=========== ===========
The above net deferred tax asset (liability) is presented on the balance
sheets as follows:
2004 2003
------------------------
Deferred tax asset - current $ 57,476 $ 40,283
Deferred tax asset (liability) - long-term 952,319 152,774
---------- ----------
Net deferred tax asset (liability) $1,009,795 $ 193,057
========== ==========
As of December 31, 2004, the Company had federal and state net operating
loss carryforwards of approximately $3,130,000 and $3,610,000,
respectively, that expire between 2018 and 2024. As of the date of
acquisition, Airgate had a net operating loss carried forward of
approximately $1,474,000, which is subject to annual usage restrictions.
The Company anticipates fully utilizing these carryforwards.
No deferred taxes have been provided on undistributed earnings of the
Company's foreign subsidiaries as these earnings will be permanently
invested in the Company's foreign operations.
15
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 11: Retirement Plans
As required by law, the Company operates a Mandatory Provident Fund (Fund)
in Hong Kong for the benefit of substantially all of its Hong Kong
employees. The assets of the Fund are held separately from those of the
Company in a separate provident fund managed by an independent trustee.
The Company makes contributions to the Fund as required. For the years
ended December 31, 2004, 2003 and 2002, the Company made contributions of
$82,265, $67,652 and $64,116, respectively.
As required by law, the Company makes contributions to the State Pension
Scheme, the Central Provident Fund (CPF) in Singapore for the benefit of
all of its Singapore employees. CPF contributions are recognized as
compensation expense in the period in which the contribution is earned.
For the year ended December 31, 2004, the Company made contributions of
$11,081.
The Company does not maintain any retirement plans for its employees in
the United States.
Note 12: Stock Plans
2000 Stock Plan
The Company has a 2000 Stock Plan ("Plan") to issue stock options and
grants pursuant to various agreements with employees, service providers,
business associates and others that will have an important business
relationship with the Company or its affiliates. The maximum number of
shares of the Company's common stock available for issuance under the Plan
is 2,200,000 shares. As of December 31, 2004, the maximum number of shares
available for future grants under the Plan was 1,092,450 shares. The
options and stock grants vest over an 18-month period.
Under the Plan, on September 1, 2000, the Company issued options to
purchase 200,000 shares of the Company's common stock at an exercise price
of $0.098. This option exercise price was equal to the estimated fair
market value of the Company's common stock at the date of issue. These
options expire on August 31, 2005. No other options have been granted. Any
proceeds received by the Company from exercises of stock options are
credited to common stock.
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees, in accounting for its issuance of stock options to
participants who are employees under the Plan. Accordingly, no
compensation expense was recognized in the Company's financial statements
because the exercise price of the Company's stock options issued to
employees equals the market price of the Company's common stock on the
date of grant.
In December 2004, the FASB issued Statement 123R, a revision to Statement
123. Statement 123R requires that companies recognize expense for these
types of equity-based compensation. The new Statement is effective
beginning in the first quarter 2006 for the Company.
16
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
A summary of the status of the plan at December 31, 2004 and 2003, and
changes during the years then ended is presented below:
2004 2003
---------------------------------------------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------
Outstanding, beginning of year 200,000 $ 0.098 200,000 $ 0.098
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
------- -------
Outstanding, end of year 200,000 $ 0.098 200,000 $ 0.098
======= =======
Options exercisable, end of year 200,000 200,000
======= =======
The following table summarizes information about stock options under the
plan outstanding at December 31, 2004:
Options Outstanding Options Exercisable
Weighted-Average
Range of Exercise Number Remaining Contractual Weighted-Average Number Weighted-Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------------
$0.098 200,000 0.67 years $0.098 200,000 $0.098
Also under the Plan, the Company has issued stock grants for 5,000 and
28,900 shares during 2004 and 2003, respectively. The Company recognizes
compensation cost for these grants over the vesting period based on the
fair value of the grant at the grant date. Compensation cost related to
these stock grants under the Plan was $6,350 and $87,463 for the years
ended 2004 and 2003, respectively.
Other Stock Grants
In November 2003, the Company entered into three service agreements with
three key employees. Under the terms of the agreements, the Company
granted to these employees a total of 1,750,000 restricted shares. The
shares are considered restricted as they have not been registered with the
Securities and Exchange Commission. Two agreements require the employees
to continue to provide services to the Company from January 1, 2004
through December 31, 2014. One agreement requires the employee to provide
services through December 31, 2008. Compensation cost is measured at the
grant date based on the estimated fair value of the restricted shares. The
compensation cost is recognized as expense over the service period
required under the agreements. The unearned portion of the compensation
cost is recorded in equity as unearned compensation cost. The Company is
holding the stock certificates pending the completion of the service
agreements. In December 2004, one of the key employees terminated her
service agreement with the Company and 850,000 restricted shares that were
previously granted were subject to cancellation in 2005. The compensation
cost related to this service agreement was reversed in the fourth quarter
of 2004.
17
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
In November 2003, the Company entered into a service agreement with a key
sales representative of the Company. Under the terms of the agreement, the
Company granted 200,000 restricted shares to the sales representative. The
shares are considered restricted as they have not been registered with the
Securities and Exchange Commission. The agreement requires the sales
representative to provide services to the Company from January 1, 2004
through December 31, 2005. Compensation cost is measured at the grant date
based on the estimated fair value of the restricted shares. The
compensation cost is recognized against income over the service period
required under the agreement. The unearned compensation cost is recorded
as a prepaid asset. The Company is holding the certificates pending the
completion of the service agreement. In December 2004, the Company reached
another agreement with the key sales representative that required $25,000
to be paid for services provided in 2004 and $25,000 to be paid for
services to be provided in 2005. The 200,000 restricted shares granted
were subject to cancellation in 2005. The related compensation cost under
the original agreement was reversed in the fourth quarter of 2004.
In March 2004, the Company granted an employee 100,000 shares of common
stock. The shares were registered with the SEC by filing a Form S-8
Registration Statement on March 29, 2004. The employee continued to
provide services to the Company from January 1, 2004 through December 31,
2005. On September 11, 2004, this employee resigned from the position of
director but agreed to continue to act as an independent consultant for
British market development. Compensation cost is measured at the grant
date based on the estimated fair value on the date of grant. The
compensation cost is recognized as expense over the service period
required under the agreements. The unearned portion of the compensation
cost is recorded in equity as unearned compensation. The Company is
holding the stock certificates pending the completion of the service
period.
Also in March 2004, the Company issued 50,000 shares of common stock to a
business advisor. The Company recorded expense of $57,750 which is the
estimated fair value of the stock on the grant date.
Note 13: Stock Warrants
At various dates in 2003, the Company issued warrants for 1,007,455 shares
related to a private stock placement. Some of the warrants were issued to
the service provider assisting the Company in the transaction (386,335
warrants) and some of the warrants were issued as detachable from the
stock issued to the purchasers (621,120 warrants). The value of the
warrants was deemed to have an immaterial value and as such no allocation
of the stock proceeds was recorded. These warrants expire five years from
the date of issuance and have exercise prices ranging from $0.80 to $2.17
per share.
18
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
In April and May 2004, the Company issued warrants for 1,778,333 shares
related to the issuance of the Series A Preferred Stock. Some of the
warrants (215,833) were issued for services received in connection with
the Preferred Stock issuance and expire five years from date of issuance.
The remaining warrants (1,562,500) were issued as detachable stock
warrants from the Series A Preferred Stock and expire seven years from the
date of issuance. As more fully described in Note 15, the warrants were
valued at $1,212,580. The warrants issued to the service providers with an
estimated fair value of $133,940, were charged to deferred financing
costs. The detachable warrants with a relative fair value of $939,713,
were charged to equity. The warrants have exercise prices that range
between $1.44 and $2.00.
In June 2004, the Company issued warrants for 100,000 shares to a
financial advisory services provider. These warrants expire five years
from the date of issuance and have exercise price at $1.15 per share.
Below is a summary of the activity of the outstanding warrants.
2004 2003
-------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------
Outstanding, beginning of year 1,007,455 $ 1.72 -- $ --
Granted 1,878,333 1.81 1,007,455 1.72
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
-------------- -------------- -------------- --------------
Outstanding, end of year 2,885,788 $ 1.78 1,007,455 $ 1.72
============== ============== ============== ==============
The following table summarizes information about warrants outstanding at
December 31, 2004:
Warrants Outstanding
Weighted-Average
Range of Number Remaining Contractual Weighted-Average
Exercise Prices Outstanding Life Exercise Price
- --------------------------------------------------------------------------------------------------------------
$0.80 to $2.17 2,885,788 3.89 years $1.78
19
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 14: Earnings Per Share
Earnings per share (EPS) were computed as follows:
Year Ended December 31, 2004
--------------------------------------
Weighted-
Average Per Share
Income Shares Amount
--------------------------------------
Net income $ 327,527
Basic earnings per share
Income available to common stockholders 327,527 25,895,059 $ 0.01
==========
Effect of dilutive securities
Stock options -- 184,179
Warrants -- 36,538
---------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 327,527 26,115,776 $ 0.01
========== ========== ==========
Common stock equivalents related to convertible preferred stock and
warrants of 2,401,065 and 2,685,788, respectively, are not included in the
calculation of dilutive earnings per share because they have an
anti-dilutive effect.
Year Ended December 31, 2003
--------------------------------------
Weighted-
Average Per Share
Income Shares Amount
--------------------------------------
Net income $ 8,489
Basic earnings per share
Income available to common stockholders 8,489 22,805,648 $ 0.00
==========
Effect of dilutive securities
Stock options -- --
Warrants -- --
---------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 8,489 22,805,648 $ 0.00
========== ========== ==========
Common stock equivalents related to stock options and warrants of 190,051
and 175,664, respectively, are not included in the calculation of dilutive
earnings per share because they have an anti-dilutive effect.
20
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Year Ended December 31, 2002
--------------------------------------
Weighted- Per Share
Income Average Shares Amount
--------------------------------------
Net income $ 702,850
Basic earnings per share
Income available to common stockholders 702,850 21,564,122 $ 0.03
==========
Effect of dilutive securities
Stock options -- 174,066
Warrants -- --
---------- ---------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 702,850 21,738,188 $ 0.03
========== ========== ==========
During 2002, options to purchase 523,400 shares of common stock at $0 per
share were granted and exercised pursuant to the terms stipulated in the
Company's 2000 Stock Plan. Therefore, there is no dilutive effect on net
income per share regarding these stock grants.
Note 15: Preferred Stock
On April 14, 2004, the Company sold to two institutional investors
$3,000,000 of Series A Preferred Stock and issued warrants to purchase
937,500 shares of common stock, at per share exercise prices of $1.76 for
468,750 shares and $2.00 for 468,750 shares. These warrants expire seven
years from date of issuance.
On May 6, 2004, the Company sold to an institutional investor $2,000,000
of its Series A Preferred Stock and issued warrants to purchase an
additional 625,000 shares of common stock at per share exercise prices of
$1.76 for 312,500 shares and $2.00 for 312,500 shares. These warrants
expire seven years from issuance.
The Series A Preferred Stock has 10,000 shares authorized and 5,000 shares
issued with a stated value of $1,000 per share. The Series A Preferred
Stock is convertible into shares of Common Stock at a conversion price of
$1.44 per share and pays a cumulative annual dividend equal to six (6%)
percent of the stated value, which at the option of the Company, subject
to certain conditions, may be paid in shares of Common Stock. The Series A
Preferred Stock is mandatorily redeemable four years from issuance. This
preferred stock is non-voting.
21
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
As the Series A Preferred Stock is mandatorily redeemable, it was recorded
in accordance with Statement 150, Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity. The
relative fair value of the Series A Preferred Stock was recorded as a
long-term liability and the dividends paid and accrued are included in
interest expense. Additionally, the Series A Preferred Stock was issued
with a beneficial conversion feature. In accordance with EITF 98-5, the
intrinsic value of the beneficial conversion option of $166,666 was
recorded as additional finance charges under the caption "Preferred Stock
dividend and amortization of deferred financing costs" and credited to
additional paid-in capital for the year ended December 31, 2004. Lastly,
in accordance with Opinion 14, Accounting for Convertible Debt and Debt
Issued With Stock Purchase Warrants, the Series A Preferred Stock and
detachable stock warrants were recorded at their relative fair values with
the value of the warrants recorded as additional equity. The fair value of
the warrants was determined based on an independent valuation.
Effectively, the Series A Preferred Stock was recorded at a discount of
$939,713. This discount will be amortized ratably over the term of the
Series A Preferred Stock. For the year ended December 31, 2004, the
Company recognized $168,312 related to the amortization of the Series A
Preferred Stock discount.
In connection with the issuance of the Series A Preferred Stock, the
Company incurred $958,741 of finance costs. These costs have been recorded
as an asset and are amortized over the term of the preferred stock.
Future amortization of the deferred financing costs and preferred stock
discount is as follows:
2005 $474,612
2006 474,612
2007 474,612
2008 134,258
22
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 16: Related Party Transactions
During the years ended December 31, 2004, 2003 and 2002, the Company had
the following transactions with related parties.
2004 2003 2002
--------------------------------------
Acquisition of subsidiary from Scott Turner,
shareholder, officer and director
Total consideration $ -- $ -- $1,430,000
Note payable -- -- 450,000
Payment of freight costs to AGI Shenzhen -- -- 125,873
Received freight income from AGI Shenzhen -- -- 2,570
Received interest income from Sparkle China -- -- 6,750
As of December 31, 2004, general banking and loan facilities granted by
various banks to the Company were secured by directors' (Alfred Lam and
Louisa Chan) personal guarantees.
As of December 31, 2003, the Company had a payable to Alfred Lam $20,493.
The payable does not accrue interest and has no fixed payment terms. This
amount was repaid in 2004.
Note 17: Business Acquisitions
On April 30, 2002, the Company acquired 81% of the outstanding common
stock of Airgate International Corporation (Airgate). The results of its
operations have been included in the consolidated financial statements
since that date. Airgate is a non-asset based logistics services and
freight forwarding company based in New York.
The acquisition was structured as a stock purchase transaction. Pacific
CMA International, LLC, a wholly owned subsidiary of Pacific CMA, Inc.,
acquired 81% of the outstanding common stock from the two principal
shareholders of Airgate, Scott Turner and Thomas Zambuto. Mr. Turner has
been a director and officer of Pacific CMA, Inc. since December 2000.
The transaction was recorded using the purchase method of accounting. The
results of operations for Airgate are included in the consolidated
financial statements since the date of acquisition. Assets and liabilities
were recorded based on fair values. The purchase price in excess of net
identified tangible and intangible assets acquired is accounted for
according to FASB Statement No. 142, Goodwill and Other Intangible Assets.
23
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Current assets $2,409,683
Property, plant and equipment 86,945
Intangible assets 2,860,000
Goodwill 2,683,768
----------
Total assets acquired 8,040,396
----------
Current liabilities 4,508,396
Long-term liabilities 572,000
----------
Total liabilities assumed 5,080,396
----------
Net assets acquired $2,960,000
==========
The $2,860,000 of acquired intangible assets is a non-contractual customer
relationship that is recorded at estimated fair value and amortized on a
straight-line basis over its estimated useful life of five years. The
$2,683,768 of goodwill represents the excess of the acquisition cost over
the current fair value of the identifiable assets of Airgate at the time
of purchase.
The purchase price was consisted of the following:
Cash paid $ 300,000
Issuance of notes payable 1,200,000
Issuance of 1,700,000 shares of Company stock valued at $0.80 per share 1,360,000
Transaction costs 100,000
----------
Total consideration for stock acquired $2,960,000
==========
Two notes were issued for $600,000 each and bore interest at a variable
rate equal to the prime rate plus 1.5% and were payable in four
installments. The final payment was due December 31, 2003. The common
stock was issued at a price of $0.80 per share, which was the average
price of the Company's common stock shortly before and after the
announcement of the acquisition. The shares issued as part of the purchase
price were issued in reliance upon exemptions from registration under
state and federal law. Such shares constitute "restricted securities" as
that term is defined in Rule 144 under the Securities Act of 1933.
24
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 18: Equity Investment in Affiliates
Equity investment in affiliates relates to ownership of Shanghai Air Cargo
Ground Handling Services Ltd ("Shanghai Air Cargo") and Vantage Point
Services Limited ("Vantage Point") for 35% and 40% respectively. Shanghai
Air Cargo began operations in April 2004. The interest in Vantage Point
was acquired by the Company in October 2004. Financial results of
operations of the affiliates from the date of acquisition to December 31,
2004 are summarized below:
2004
Shanghai Air Cargo Vantage Point
-----------------------------------
Net sales $ 873,756 $ 239,710
Cost of sales 570,683 205,884
Gross profit 286,269 33,826
Net Income (loss) 25,562 (309)
Equity in income (loss) of affiliates 8,947 (124)
Note 19: Stock Transaction With Infinity Ventures
Pursuant to an agreement (Stock Purchase Agreement) dated December 4, 2001
entered into between Infinity Ventures Net, Inc. (Selling Shareholder) and
the Company, 1,100,000 shares of common stock were issued to the Selling
Shareholder at an initial purchase price of $0.0001 per share on December
19, 2001. These 1,100,00 shares were issued in a stock purchase
transaction which was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1993 or Rule 505 or 506 promulgated thereunder. The
Stock Purchase Agreement contained several rights and obligations between
the parties which have the effect of changing the actual purchase price
for the shares. These included a "Call Right" which allowed the Company to
repurchase the shares unless the Selling Shareholder contributed
additional capital to the Company, a "Release Right" which allowed the
Selling Shareholder to cancel the Company's call right by contributing
additional capital, and a "Put Right" which required the Company to
repurchase a portion of the shares in certain circumstances.
In conjunction with the Stock Purchase Agreement, pursuant to a private
placement prospectus filed on December 26, 2001, the Selling Shareholder
intended to offer these 1,100,000 shares of common stock at market price.
However, there was a dispute with the Selling Shareholder concerning the
issue of whether the shares, with the understanding that they would be
subject to the Company's call right, remained valid even though it was not
possible to get the registration statement for the shares approved by the
SEC. The SEC would not accept the structure of the transaction unless the
Selling Shareholder was legally obligated to pay the additional
consideration. The Selling Shareholder refused to agree to an
unconditional obligation to pay for the shares so it was not possible to
get the registration statement approved for the transaction. For this
reason, a "Request for Withdrawal" for the private placement was filed on
February 8, 2002. These 1,100,000 shares of common stock were then
cancelled and the initial purchase price of $110 was returned to the
Selling Shareholder.
25
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
For accounting purposes as of December 31, 2001, these 1,100,000 shares of
common stock were excluded from the outstanding capital stock of the
Company to reflect the substance of the whole transaction.
In June 2002, the Company commenced an action against the Selling
Shareholder in the United States District Court for the Southern District
of New York in which the Company sought, among other things, to compel the
return of 1,100,000 shares of common stock that had been issued to the
Selling Shareholder. This action was settled in November 2002 by the
Selling Shareholder's return of 1,050,000 of such shares, the Company's
payment to the Selling Shareholder of $172,500 and the agreement to permit
the Selling Shareholder to keep 50,000 shares. As a result, for accounting
purposes, these 50,000 shares of common stock were deemed as issued and
outstanding from November 2002. The fair value of the shares issued of
$12,500 was expensed during the year. Total amount of $257,500, including
the amount of $185,000 mentioned above and legal fees of $72,500, is
included as a settlement of litigation.
Note 20: Disposal of a Subsidiary
On April 2, 2002, the Company sold all of the issued and outstanding
shares of stock of its wholly owned subsidiary, Sparkle Shipping, Godown,
Wharf & Transp. Co. Limited (Sparkle) to a third party for $589,744.
The Company received $58,974, 10% of total purchase price at closing, the
remaining purchase price is payable in four quarterly installments of
$66,346 and two final quarterly installments of $132,012. Payments
commenced July 1, 2002 with final payment due December 31, 2003.
Sparkle was principally engaged in business activities of feeder voyages
and trucking operations along the Jujiang Delta Area of Mainland China.
Its trucking operations were immaterial to the Company's overall business,
therefore, this disposition of Sparkle was not treated as a discontinued
operation for financial statement presentation. Sparkle was affected by
business environmental changes in this region and was forced to purchase
its own feeders and trucks in order to continue its operations. As the
Company acts as a non-asset based freight-forwarding provider, Sparkle was
disposed of in order to be consistent with the Company's strategic plan.
After the disposal of Sparkle, its sea forwarding operations were handled
by other subsidiaries of the Company through its agents in Mainland China.
26
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
In connection with this transaction, the Company recognized a gain of
$11,390.
Net assets disposed
Property, plant and equipment $ 24,667
Trade and other receivables 495,650
Due from a director 299,869
Deferred taxes 10,202
Cash at banks 95,596
Trade and other payables (230,511)
Due to fellow subsidiaries (117,119)
---------
578,354
Selling price 589,744
---------
Gain on disposal $ 11,390
=========
Note 21: Disclosures About Fair Value of Financial Instruments
The estimated fair value of the preferred stock using a discounted cash
flow model is approximately $4,700,000.
The carrying amounts of all other financial instruments approximate the
fair value of those instruments.
Note 22: Significant Estimates and Concentrations
Accounting principles generally accepted in the United States of America
require disclosure of certain significant estimates and current
vulnerabilities due to certain concentrations. Those matters include the
following:
General Litigation
The Company is subject to claims and lawsuits that arise primarily in the
ordinary course of business. It is the opinion of management that the
disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of
the Company.
27
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Major Supplier
Purchases from and payables to suppliers who have 10% or more of the
Company's total purchases and payables are as follows:
2004 2003 2002
Purchases Payable Purchases Payable Purchases Payable
--------------------------------------------------------------------------------
Supplier A --% --% --% --% --% 14%
------- ------- ------- ------- ------- -----
--% --% --% --% --% 14%
======= ======= ======= ======= ======= =====
Major Customers
Sales to and receivable from customers who has 10% or more of the
Company's total sales and receivables are as follows:
2004 2003 2002
Sales Receivable Sales Receivable Sales Receivable
--------------------------------------------------------------------------------
Customer A 12% --% 14% --% 12% --%
Customer B 10 -- -- -- -- --
Customer C -- -- -- -- -- 11
------- ------- ------- -------- ------- -------
22% --% 14% --% 12% 11%
======= ======= ======= ======== ======= =======
Note 23: Commitments
Cargo Commitments
The Company has entered into written agreements with various carriers
pursuant to which the Company is committed to utilize a guaranteed minimum
amount of cargo space each year. As of December 31, 2004, the minimum
amount of such cargo space to be utilized in 2005 was approximately
$4,500,000.
Letters of Credit
Certain banks have issued letters of credit to guarantee performance to
certain vendors on behalf of the Company. The amount available under the
letters of credit is approximately $578,000 as of December 31, 2004. These
letters of credit are secured by restricted cash.
28
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note 24: Segments of the Business
Business Segments
The Company operates mainly in two business segments. Those segments are
air forwarding and sea forwarding services. The following table summarizes
the Company's operations during the years ended December 31, 2004, 2003
and 2002 by operating segment.
Air Forwarding Sea Forwarding
2004 2003 2002 2004 2003 2002
----------------------------------------------------------------------------------------------
Revenue $ 65,169,422 $ 47,346,429 $ 36,392,050 $ 34,431,032 $ 25,746,735 $ 16,505,750
Cost of forwarding (55,091,649) (40,350,177) (30,795,210) (29,730,147) (22,189,891) (14,196,471)
Depreciation and amortization (506,397) (474,617) (342,941) (181,605) (165,958) (112,693)
Interest expense (140,850) (99,735) (66,735) (27,558) (9,999) (3,023)
Other segment expenses
attributable to segment (3,089,237) (2,746,804) (1,929,554) (1,742,220) (1,361,309) (827,257)
------------ ------------ ------------ ------------ ------------ ------------
Segment income (loss) $ 6,341,289 $ 3,675,096 $ 3,257,610 $ 2,749,502 $ 2,019,578 $ 1,366,306
============ ============ ============ ============ ============ ============
Net other unallocable expenses*
Minority interest
Net income
Goodwill $ 1,798,573 $ 2,012,826 $ 2,012,826 $ 941,935 $ 670,942 $ 670,942
Intangible assets 888,429 1,430,000 1,859,000 469,385 476,667 619,667
Other assets 22,160,177 12,406,725 8,693,320 5,031,843 5,390,120 2,795,911
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 24,847,179 $ 15,849,551 $ 12,565,146 $ 6,443,163 $ 6,537,729 $ 4,086,520
============ ============ ============ ============ ============ ============
Land Forwarding** Total
2004 2003 2002 2004 2003 2002
------------------------------------------------------------------------------------------
Revenue $ -- $ -- $ 5,937 $ 99,600,454 $ 73,093,164 $ 52,903,737
Cost of forwarding -- -- (13,393) (84,821,796) (62,540,068) (45,005,074)
Depreciation and amortization -- -- (3,793) (688,002) (640,575) (459,427)
Interest expense -- -- (771) (168,408) (109,734) (70,529)
Other segment expenses
attributable to segment -- -- (13,057) (4,831,457) (4,108,113) (2,769,868)
------------ ------------ ------------ ------------ ------------ ------------
Segment income (loss) $ -- $ -- $ (25,077) 9,090,791 5,694,674 4,598,839
============ ============ ============
Net other unallocable expenses* (8,782,461) (5,686,185) (3,895,989)
Minority interest 19,197 -- --
------------ ------------ ------------
Net income $ 327,527 $ 8,489 $ 702,850
============ ============ ============
Goodwill $ -- $ -- $ -- $ 2,740,508 $ 2,683,768 $ 2,683,768
Intangible assets -- -- -- 1,357,814 1,906,667 2,478,667
Other assets -- -- 528 27,192,020 17,796,845 11,489,759
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ -- $ -- $ 528 $ 31,290,342 $ 22,387,280 $ 16,652,194
============ ============ ============ ============ ============ ============
* The amounts comprised general and administrative expenses for which it was
impracticable to make an allocation into each reportable segment.
** - This segment was sold in 2002.
29
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Geographical Segments
The table below summarized the Company's revenues during the years ended
December 31, 2004, 2003 and 2002 analyzed into geographical locations:
2004 2003 2002
------------------------------------------
*IATA Area 1 $15,157,473 $ 8,986,684 $10,966,084
*IATA Area 2 23,966,060 15,119,636 4,436,153
*IATA Area 3 60,476,921 48,986,844 37,501,500
----------- ----------- -----------
Total $99,600,454 $73,093,164 $52,903,737
=========== =========== ===========
The tables below summarize the Company's assets as of December 31, 2004,
2003 and 2002 analyzed into geographical locations:
Trade Other Total
Receivables Assets Assets
------------------------------------------
2004
*IATA Area 1 $ 9,521,971 $ 8,802,869 $18,324,840
*IATA Area 2 2,101,998 -- 2,101,998
*IATA Area 3 1,856,862 9,006,642 10,863,504
----------- ----------- -----------
Total $13,480,831 $17,809,511 $31,290,342
=========== =========== ===========
Trade Other Total
Receivables Assets Assets
------------------------------------------
2003
*IATA Area 1 $ 5,309,072 $ 7,728,387 $13,037,459
*IATA Area 2 291,203 -- 291,203
*IATA Area 3 1,760,584 7,298,034 9,058,618
----------- ----------- -----------
Total $ 7,360,859 $15,026,421 $22,387,280
=========== =========== ===========
Trade Other Total
Receivables Assets Assets
------------------------------------------
2002
*IATA Area 1 $ 4,692,698 $ 6,315,954 $11,008,652
*IATA Area 2 116,507 -- 116,507
*IATA Area 3 1,654,936 3,872,099 5,527,035
----------- ----------- -----------
Total $ 6,464,141 $10,188,053 $16,652,194
=========== =========== ===========
30
Pacific CMA, Inc.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
* IATA Area 1 comprises all of the North and South American continent
and the adjacent islands, Greenland, Bermuda, the West Indies and
the islands of the Caribbean Sea, the Hawaiian Islands (including
Midway and Palmyra).
IATA Area 2 comprises all of Europe (including the European part of
the Russian Federation) and the adjacent islands, Iceland, The
Azores, all of Africa and the adjacent islands, Ascension Island,
that part of Asia lying west of and including Iran.
IATA Area 3 comprises all of Asia and the adjacent islands, except
that portion included in IATA Area 2, all of the East Indies,
Australia New Zealand, and the adjacent islands, the islands of the
Pacific Ocean except those included in IATA Area 1.
31